01-31-2011, 03:50 PM
Of course the performance of an asset reduces over the time, provided the BMR activity is not undertaken. Due to this, reducing balance method may be a better measure.
However, this is not a hard and fast rule; even in the established industries, when you introduce new product lines or enhance the capacity of existing plants, there is always a threat of getting the upfront market share (in both cases). We have seen a lot of such examples in various industries specially the consumer products and food industries. Inspired of the market situation, people jump into capacity enhancements and new products and then they have to wait for longer tenures to get the product memorized by end-consumers. Just look at new juices, edible oils, shampoos, detergents and other such products.
However, this has been untrue in case of some other industries like cement; where people enhanced capacities unbelievably and still kept on absorbing their produce in the market with no hassle.
So, this is subjective and can be witnessed both ways.
Practically, there are always differences between tax base and accounting base of PPE assets due to accelerated allowances given by tax laws; one example you quoted is initial allowance. In other countries you may be seeing extra shift allowances as well as investment allowances with respect to BMRs etc. This was also practiced in Pakistan in earlier years. People also have different recognition/capitalization criteria against the tax laws. Even if you have same depreciation rates and you have no initial allowance for, say last two years, the temporary differences would arise on account of such allowances enjoyed in previous years. Why? Because due to earlier yearsâ acceleration of depreciation under tax laws, your WDVs (accounting and tax bases) would differ and keep on differing forever.
However, if you get a unique case where depreciation rates are same, tax and accounting bases are same, historically no acceleration has ever been allowed; then you are right, there would arise no temporary difference.
Regards,
However, this is not a hard and fast rule; even in the established industries, when you introduce new product lines or enhance the capacity of existing plants, there is always a threat of getting the upfront market share (in both cases). We have seen a lot of such examples in various industries specially the consumer products and food industries. Inspired of the market situation, people jump into capacity enhancements and new products and then they have to wait for longer tenures to get the product memorized by end-consumers. Just look at new juices, edible oils, shampoos, detergents and other such products.
However, this has been untrue in case of some other industries like cement; where people enhanced capacities unbelievably and still kept on absorbing their produce in the market with no hassle.
So, this is subjective and can be witnessed both ways.
Practically, there are always differences between tax base and accounting base of PPE assets due to accelerated allowances given by tax laws; one example you quoted is initial allowance. In other countries you may be seeing extra shift allowances as well as investment allowances with respect to BMRs etc. This was also practiced in Pakistan in earlier years. People also have different recognition/capitalization criteria against the tax laws. Even if you have same depreciation rates and you have no initial allowance for, say last two years, the temporary differences would arise on account of such allowances enjoyed in previous years. Why? Because due to earlier yearsâ acceleration of depreciation under tax laws, your WDVs (accounting and tax bases) would differ and keep on differing forever.
However, if you get a unique case where depreciation rates are same, tax and accounting bases are same, historically no acceleration has ever been allowed; then you are right, there would arise no temporary difference.
Regards,
