Financing, tax and inflation consistency

Learning objectives

• Identify the exclusion of financing and income tax cash flows and the requirement for consistency between cash flows and discount rate (nominal or real).L2
• Analyse a value in use calculation to detect an inconsistency between cash flows and discount rate or a double counting of the time value of money.L3

Normative references

• IAS 36 §40Requires consistency between cash flows and discount rate as regards inflation: nominal cash flows with a nominal rate, real cash flows with a real rate (excluding general inflation but including specific future price increases or decreases).
• IAS 36 §50Excludes from the cash flows those relating to financing activities and income tax receipts or payments.
• IAS 36 §51Justifies these exclusions by the consistency between cash flows and discount rate, so that no assumption is double-counted or omitted: since the time value of money is taken into account by discounting, financing cash flows are excluded; since the discount rate is determined on a pre-tax basis, the cash flows are also pre-tax.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

14 questions

• Melvane is preparing the last projection year of an injection moulding press, which will be sold at the end of that year. It expects {operating_receipts} of operating receipts, {operating_payments} of operating payments and {allocated_overheads} of reasonably allocated overheads. The disposal should bring in {disposal_proceeds} between knowledgeable, willing parties, with {disposal_costs} of costs of disposal. Its model also includes {income_tax} of income tax and {interest} of loan interest. What total cash flow should be used for this last year?L3
• The Port-Aurel salt works are in the last operating year of their harvesting equipment. This year's value in use model includes: salt sales collected {salt_sales}, production payments {production_payments}, a reasonably allocated share of central costs {overhead_share}, day-to-day servicing {routine_maintenance}, sale of the equipment at year-end to knowledgeable, willing parties {equipment_sale}, with {sale_costs} of costs of disposal. The treasurer has also entered the repayment of a loan of {loan_repayment} and the payment of {environmental_provision} under an environmental provision already recognised. Determine the total cash flow for this last year.L3
• True or false? Dorlane financed a press with a bank loan: the annual interest on this loan must be deducted from the cash flows used for the press's value in use.L2
• True or false? Income tax payments and refunds are excluded from the cash flows used to estimate value in use.L2
• True or false? An entity may discount cash flows expressed in real terms, that is excluding general inflation, at a nominal rate that includes inflation, provided it applies the same method every year.L2
• Why are cash flows from financing activities excluded from the cash flows used for value in use?L2
• Fenrival prepares its projections at constant prices, excluding general inflation. It nevertheless expects an increase in the price of energy well above general inflation. Which approach is consistent?L2
• Since the value in use discount rate is a pre-tax rate, how must the cash flows be estimated?L2
• The value in use spreadsheet of a cutting line at Gralmont describes four construction choices. Which one is an error?L3
• For a cold storage warehouse, Isembre projects its cash flows by applying annual general inflation of 2% to prices and costs. It discounts them at a real pre-tax rate of 6%, provided by a valuer. Which of the following findings identifies the error?L3
• The value in use calculation memo for a wind farm at Jarnelle sets out the following choices. Which one is wrong?L3
• While reviewing the value in use of a Kerlande plant, you note the following items. Which of them must be corrected?L3
• Which of the following cash flows are excluded from the estimate of the value in use of a Lumbreval workshop?L2
• An analyst at Morvaine deducts from the cash flows of a port terminal the interest on the debt that financed it, then discounts those cash flows at the value in use discount rate. What is the consequence of this approach?L3