The ACCA Learning Community
Home
191 online now

Thin capitalisation

0 Votes
Thin capitalisation

Hi,

Can anyone explain why the equity required for the full interest deductibility in Question 5 b) of F6 POL 2014 Dec was calculated as follows:

e = (100 million – e) * (1+ interest rate)/3?

e - equity
100 (million) - debt

I'm fully aware that the equity-to-debt ratio governing the application of this rule has changed from 1:3 to 1:1 since 01.01.2015, yet I can't seem to understand why the formula (after some reworks) would be

e / [(100 - e)*(1+i)] = 1:3

I'm puzzled by what's in the denominator. Why the excess interest portion (100-e) is multiplied by (1+i)?
Why not simply:

e/100*(1+i) = 1:3

Interest are included because of the conservative approach.

August 23rd 2018 AN ACCA USER 240 Points
Edited August 23th 2018 AN ACCA USER

Please log in or register to reply to this question.

...