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Pretax Examples Web

The document outlines the process of calculating the value in use for Factory A, a separate cash-generating unit, using pre-tax cash flows and considering tax implications. It provides detailed estimations of future cash flows, tax payments, and the calculation of pre-tax and post-tax discount rates. The final pre-tax rate calculated for the value in use is 18.5% after adjustments for tax effects and cash flow timing.

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11 views4 pages

Pretax Examples Web

The document outlines the process of calculating the value in use for Factory A, a separate cash-generating unit, using pre-tax cash flows and considering tax implications. It provides detailed estimations of future cash flows, tax payments, and the calculation of pre-tax and post-tax discount rates. The final pre-tax rate calculated for the value in use is 18.5% after adjustments for tax effects and cash flow timing.

Uploaded by

mamunkufinance
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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www.ifrsbox.com Example: Pre-tax vs.

post-tax rate

CFO in your company identified that factory A might be impaired as of 31-Dec-2010. Factory A is separate cash generatin
(CGU). He asked you to calculate its value in use and he provided the following data to you:
1. Estimation of future cash flows from factory A for the years 2011-2015. All cash flows are stated pre-tax.
2. Estimation of future tax payments related to cash flows. You discover that tax payments are paid 1 year after related c
flow occurs - this is not adjusted in the table from CFO. You also find out that CFO did not include tax effect of tax loss
amortization from 2009 into tax payments table. Amortization schedule is as follows: year 2011-
2 000 EUR, year 2012 - 1 800 EUR, year 2013 - 1 600 EUR.
3. On the Internet you find out that return on equity of the similar company with similar history and similar risks that fac
is 11.2%. Standard tax rate in your country is 20%.
Calculate pre-tax discount rate that you will use for value in use calculation.

Related tax
Year Future CF
payments
2011 35,000 7,100
2012 40,000 7,800
2013 38,000 7,400
2014 22,000 4,000
2015 10,000 2,200
145,000 28,500

Using single formula calculation:

Formula used: Pre-tax rate = Post-tax rate / (1 - Tax rate)

Post-tax rate: 11.20%

Standard tax rate: 20.00%

Pre-tax rate: 14.00%

Discount
Year Future CF Present value
factor
2011 35,000 0.877 30,702 Discount factor
2012 40,000 0.769 30,779 Formula used: DF= 1/(1+n)^(year-2010)
2013 38,000 0.675 25,649
2014 22,000 0.592 13,026
2015 10,000 0.519 5,194
145,000 105,349

Using top-down calculation:

Estimation of post-tax future cash flows + calculation of value in use:

A B C D=A-B+C
Related tax Adjusted tax Tax loss Post-tax
Year Future CF
payments payments amortized future CF
2011 35,000 7,100 0 2,000 37,000
2012 40,000 7,800 7,100 1,800 34,700
2013 38,000 7,400 7,800 1,600 31,800
www.ifrsbox.com Example: Pre-tax vs. post-tax rate

2014 22,000 4,000 7,400 0 14,600


2015 10,000 2,200 4,000 0 6,000
2016 2,200 0 -2,200
145,000 28,500 26,300 5,400 124,100

Calculation of pre-tax rate:


Calculation of pre-tax rate using Goal Seek:
Discount 1. From Excel Menu Bar, click on Data.
Year Future CF Present value
factor 2. Find the Data Tools panel and click on the What
2011 35,000 0.844 29,547 3. From the What if Analysis menu, select Goal See
2012 40,000 0.713 28,506 4. In the Dialog box, fill in the following info:
2013 38,000 0.602 22,862 Set cell: Enter cell n., where your value in use is.
2014 22,000 0.508 11,174 To value: Enter value in use calculated in previou
By changing cell: Enter cell where your pre-tax
2015 10,000 0.429 4,288
2016 0.362 0
145,000 96,376

Pre-tax rate: 18.5%


www.ifrsbox.com Example: Pre-tax vs. post-tax rate

. Factory A is separate cash generating unit


to you:
ows are stated pre-tax.
yments are paid 1 year after related cash
id not include tax effect of tax loss
ws: year 2011-

milar history and similar risks that factory A

actor
ed: DF= 1/(1+n)^(year-2010)

Discount
Present value
factor
0.899 33,273
0.809 28,062
0.727 23,127
www.ifrsbox.com Example: Pre-tax vs. post-tax rate

0.654 9,548
0.588 3,529
0.529 -1,164
96,376

pre-tax rate using Goal Seek:


Menu Bar, click on Data.
ta Tools panel and click on the What if Analysis .
hat if Analysis menu, select Goal Seek.
g box, fill in the following info:
ter cell n., where your value in use is.
nter value in use calculated in previous step.
g cell: Enter cell where your pre-tax rate is.

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