DECISION OF MINISTER OF FINANCE

ON THE EXPERIMENTAL APPLICATION OF THE ADJUSTED DECLINING - BALANCE METHOD IN FIXED ASSET DEPRECIATION

MINISTER OF FINANCE

Pursuant to the Decree No 15/CP dated 2nd March 1993 of the Government providing task, power and responsibility in the state management of ministries, ministerial agencies;
Pursuant to the Decree No 178/CP dated 28th October 1994 of the Government providing task, power and organizational apparatus of Ministry of Finance;
Facilitating enterprises to replace, renew machinery and equipment so as to apply advanced technology, modern technique best suited business requirements of enterprises and the economy;
According to the request of the Director General of the Financial Policy Department;

DECIDES

Article 1: Experimentally applying the depreciation regime using adjusted declining - balance method for some fixed assets that have high invisible worn out rate and need to be replaced and renewed, at five (5) enterprises stipulated in annex I issued together with this Decision.

During the period of experimentally applying the depreciation regime using adjusted declining - balance method, the aforesaid enterprises should ensure attaining profit from production and business. 

Article 2: The fixed assets used in business that are allowed to deduct the depreciation expense according the adjusted declining - balance method should simultaneously satisfy following conditions:

+ They are machinery and equipment producing products of high and new technology projects as provided in the Circular No 02/2001/TT-BKHCNMT dated 15th February 2001 of the Ministry of Science, Technology and Environment.

+ They are newly invested fixed assets (not yet used), used fixed assets that have remaining value of more than 70%  (compared with original cost of fixed assets that are being used by the enterprise, or the selling price of the new fixed assets of the same category or equivalent fixed assets in the market in relation to the used assets that are purchased by the enterprise).

Article 3: The determination of depreciation deduction level of fixed assets according to the adjusted declining - balance method is carried out in following steps:

Steps 1: Defining the life time of fixed assets:

The enterprise defines the life time of fixed assets according to the provision of point (1), Article 15 of the Decision No 166/1999/QD-BTC dated 30th December 1999 issued by Ministry of Finance on the regime of depreciation management, use and deduction of fixed assets.

Step 2: Defining annual depreciation expense of fixed assets in initial years according to following formula:

In which:

a/ The remaining book value of fixed assets is defined by the difference between the original cost and accumulated depreciation of fixed assets at the closing date of the last fiscal year. With regard to new fixed assets, the remaining value used for computing the first year depreciation is the original cost of the said fixed assets.

b/ The accelerated depreciation rate is determined according to following formula

- Straight - line depreciation rate is defined as follows:

- The adjusted ratio which is defined on the basis of life time of new fixed assets  in the hereunder table (stipulated according to Annex I - Decision No 166/1999/QD-BTC):

- In the ending years, when the annual depreciation expense defined according to the adjusted declining - balance method is equal (or less than) to the average depreciation expense computed by dividing the remaining book value by the remaining life time years of the fixed assets, then starting from that year the depreciation expense shall be computed by taking the remaining book value of the fixed assets to divide by the remaining life time years of the said assets ( see example at Annex II).

Article 4: Enterprises that are allowed to experimentally apply depreciation regime using the adjusted declining - balance method are entitled to compute annual depreciation expense into reasonable expenditure for income tax purposes.

Article 5: Other stipulations on the management, use and depreciation deduction of the fixed assets are still following the Decision No 166/1999/QD-BTC dated 30th December 1999 of Ministry of Finance.

Article 6: This Decision shall have the effect from 1st January 2002 to 31st December 2003.

During the implementation, Ministry of Finance shall cooperate with the aforesaid enterprises to evaluate the experimental application of the depreciation regime using adjusted declining - balance method.

Article 7: The heads of units of Ministry of Finance, the enterprises experimentally applying the said depreciation method are responsible to implement this Decision.

ANNEX I

LIST OF ENTERPRISES PARTICIPATING IN THE EXPERIMENTAL APPLICATION OF DEPRECIATION REGIME USING THE ADJUSTED DECLINING - BALANCE METHOD

ANNEX II

EXAMPLES OF DEPRECIATION COMPUTATION AND DEDUCTION OF FIXED ASSETS BY ADJUSTED DECLINING - BALANCE METHOD
(Issued together with the Decision No 2000/QD-BTC  dated 31st December 2001 of Minister of Finance).

Example 1: Company A purchases brand new equipment producing electronic parts (it is not the used equipment) at the price of VND 10 millions.

Step 1: the life time of fixed assets defined according to stipulations of Annex I (issued together with the Decision No 166/1999/QD-BTC) is 5 years.-

- The annual depreciation rate of fixed assets by using the straight - line method is 20%.

- The accelerated depreciation rate by using the declining - balance method is 20% x 2 (adjusted ratio) = 40%

- The depreciation deduction level of the said fixed assets is computed concretely in the following table:

In which:

+ The depreciation expense of fixed assets from the first year to the end of the third year is computed by taking the remaining book value of fixed assets to multiply with the accelerated depreciation rate (40%).

+ From the fourth year onward, the annual depreciation expense is equal to   result of the division between the remaining book value of fixed assets (at the beginning of the fourth year) and the remaining life time years of fixed assets (2,160,000 : 2 = 1,080,000). [as in the fourth year: the depreciation expense according to the declining-balance method (2,160,000 x 40% = 864,000) is less than the average depreciation expense computed by taking the remaining book value of fixed assets dividing by the remaining life time of fixed assets (2,160,000 : 2 = 1,080,000)].

Example 2: Enterprise B is using a motor driven machine which has the original purchasing price of VND 50 millions. This machine has been used  for two years, the deducted depreciation expense is VND 10 millions. The remaining book value of this fixed asset is VND 40 millions.

Step 1: The life time of the fixed asset defined according to stipulations of Annex I (issued together with the Decision No 166/1999/QD-BTC) is 10 years.

Step 2: The annual depreciation is defined as follows:

- The annual depreciation rate according to the straight - line method is 10%

- The accelerated depreciation rate by using the declining - balance method = 10% x 2.5 (adjusted ratio) = 25%.

- The annual depreciation rate  of the said fixed asset is computed concretely in the following table:

In which:

+ The depreciation expense of the fixed asset from the third year to the end of the sixth year is computed by taking the remaining book value of the fixed asset to multiply with the accelerated depreciation rate (25%).

+ From the seventh year onward, the annual depreciation expense is the result of the division between the remaining book value of fixed (at the beginning of the seventh year) and the remaining life time of the fixed asset (12,656,250 : 4 = 3,164,063). [As at the seventh year: the depreciation expense computed according to the declining-balance method  (12,656,250 x 25% = 3,164,064)  is equal to the average depreciation expense computed by taking the remaining book value of fixed assets dividing by the remaining life time of fixed assets (12,656,250 : 4 = 3,164,063)].

Example 3: Company C purchases an old electronic equipment (used equipment) at the price of VND 70 millions. The selling price of the brand new equipment of the same category is VND 100 millions.

Step 1: The life time of this fixed asset which is self defined by the company according to point (1), Article 15 of the Decision No 166/1999/QD-BTC is 5 years. 

Step 2: The annual depreciation expense of the fixed asset is defined as follows:

- The life time of the brand new equipment of the same category defined according to the Decision No 166/1999/QD-BTC is 8 years. Thus, the adjusted ratio of depreciation rate is 2.5 times.

- The annual depreciation expense of the straight - line  of the said old equipment is 20%.

- The accelerated depreciation rate of the said old equipment is equal to 20% x 2.5 = 50%.

- The annual depreciation expense of the said old equipment is computed concretely in the following table:

In which:

+ The depreciation level of the said old equipment  from the first year to the third year is computed by taking the remaining book value of the equipment to multiply with the accelerated depreciation rate (50%).

+ The depreciation expense from the fourth year to the fifth year is the result of the division between the remaining book value of fixed (at the beginning of the fourth year) and the remaining life time of the fixed asset (12,656,250 : 4 = 3,164,063). [As at the fourth year: the depreciation expense computed according to the declining-balance method (8,750,000 x 50% = 4,375,000) is equal to the average depreciation expense computed by taking the remaining book value of fixed assets dividing by the remaining life time of fixed assets (8,750,000 : 2 = 4,375,000)].