The 'Depreciation Capital-Allowance Transform' (D-CAT) Model : Decomposing the Divergence between Accounting Depreciation and Tax Depreciation

I present a mathematical model that directly links Accounting Depreciation and Capital Allowance (Tax Depreciation), describing the numerical process in which the former can be transformed into the latter. Applying this model to Deferred Taxation, I propose that the “movement of temporary difference” (arising from the divergence between Depreciation and Capital Allowance) can be decomposed and explained as the interaction of the following 3 effects: (1) “Rate” effect – different rates between Accounting and Tax Depreciation(2) “Initial Allowance” effect – Initial Allowance occurs only under Tax Depreciation but is absent from Accounting Depreciation(3) “Asset Exclusion” effect – different asset stream from which Accounting and Tax Depreciation is computed.The D-CAT model may find use as a numerical predictor of Tax Depreciation, as a teaching tool to better understand the differences between Accounting and Tax Depreciation, and as a theoretical framework for understanding the components of the specific temporary differences (for deferred tax purposes) arising from Property, Plant and Equipment. A practical application of the above is Attribution Analysis where the component effects are quantified to identify the dominant component for monitoring, for research modeling or possibly for heightening financial reporting.The D-CAT model has been developed within the framework of Malaysia's income tax laws and Malaysian accounting standards. Since the latter is closely alignment with global practices, it is envisaged that the model can be adapted internationally to any accounting and tax framework based on Straight-Line method of Accounting Depreciation and Tax Depreciation (with or without an Initial Allowance)