ACCA Advanced Taxation (ATX) Practice Exam

How is the adjustment period for leased non-current assets determined if the lease is less than ten years?

1. It remains at 10 years

2. It reduces to 5 years

3. It can vary based on asset type

4. It's disregarded in tax calculations

The correct answer is: It reduces to 5 years

The adjustment period for leased non-current assets is generally determined based on the length of the lease and relevant tax regulations. When a lease has a term of less than ten years, the adjustment period typically reduces to a specified timeframe, which in this context is five years. This adjustment is made to reflect the shorter economic lifespan that the asset will be utilized under the lease agreement. This five-year period allows for a more accurate calculation of tax deductions related to the lease, aligning the expense recognition with the actual use of the asset. Since the lease term is shorter, the tax regulation encourages businesses to maximize their deductions over the period that the leased asset is actively contributing to income generation. Understanding this reduces the chances of overestimating deductions in situations where an asset may not be utilized to the same extent over longer periods. Hence, adjusting the timeframe to five years provides a better correlation between tax liabilities and the actual economic benefits derived from the leased asset.