CFM96490 - Interest restriction: group-EBITDA: example 2

The RS group owns an investment property and this is revalued each period. This was acquired at some time before 1 January 2018 for £6m.

Year ended 31 December 2018

At the start of the period the property is included in the group’s financial statements at a value of £4 million.

During the period the group carried out a review of the property. In the light of deteriorating market conditions, the property is be revalued down to £2.5 million, an adjustment of £1.5m. A revaluation loss of £1.5m has been included in calculating the group’s profit before tax for the period.

The capital (fair value movement) adjustment in respect of the property will be £1.5 million. This is the fair value movement for the year and is a positive adjustment so as to add the revaluation loss to profit before tax in computing group-EBITDA.

Year ended 31 December 2019

During the period the market improves significantly and group disposes of the property for £7.2 million, incurring disposal costs of £0.2 million and recognising a profit on disposal of the asset of £4.5 million.

The net capital (disposals) adjustment in respect of the property will be a deduction of £(3.5) million. This comprises two elements.

• The accounting profit on disposal of £4.5m is included in item B in S419(1) thereby reducing Group-EBITDA.
• The recalculated profit amount is the excess of the relevant proceeds over the relevant cost. The relevant proceeds are the sale price of £7.2m less disposal costs of £0.2m. The relevant cost, applying is the historic cost of £6m. Accordingly the recalculated profit on disposal, included in item C is £1 million. This is added in computing group-EBITDA.

The net effect is therefore to subtract £4.5m and add £1m to profit before tax, as part of the computation of group-EBITDA.

Variant on example 2

Suppose in example 2, the property had been revalued up to £7.5m in 2018, rather than down to £2.5m.

In the period of account to 31 December 2018, the group’s consolidated financial statements will recognise a revaluation gain of £3.5m. This amount is deducted from the group profit before tax in computing group-EBITDA. There has been no disposal so the adjustment is not restricted by reference to historic cost.

In the period to 31 December 2019, there is now a loss on disposal in the financial statements on disposal of the property of £0.5m (net proceeds £7m less opening carrying value of £7.5m). This is included within item A and added to group profit before tax in computing group-EBITDA.

The gain by reference to historic cost is £1m as in the example above and this amount is included within item C and also added to group profit before tax in computing group-EBITDA.

This is an example of an item C adjustment arising in a period in which the financial statements disclose a loss on disposal of a relevant asset. The adjustment ensures that, on a cumulative basis, the correct depreciation and amortisation adjustment (DA) is taken into account as regards the relevant asset in computing group-EBITDA.