Circular No. 36/TC-TCDN guiding the basic depreciation regime for fixed assets in state-owned enterprises

CIRCULAR

MINISTRY OF FINANCE DECREE NO. 36/TC-TCDN DATE April 27, 1995

GUIDELINES ON THE BASIC DEPRECIATION SYSTEM FOR FIXED ASSETS IN STATE ENTERPRISES

IMPLEMENTING Decision No. 51/TTg dated January 21, 1995 of the Prime Minister "regulating the basic depreciation system for fixed assets in state enterprises." The Ministry of Finance provides guidelines on the establishment and use of basic depreciation funds at state enterprises as follows:

1. The basic depreciation system for fixed assets in state enterprises applies to all existing fixed assets directly managed and used by state enterprises from all sources of investment: State, bank loans, and other domestic and foreign entities, aid, gifts, joint ventures, joint operations, etc. (excluding leased fixed assets for operation).

I.GENERAL PROVISIONS.

2. The rate of basic depreciation of fixed assets calculated as a percentage according to the regulations of the Ministry of Finance based on the original cost of fixed assets recorded in the enterprise's accounting books. This rate is applied to each type of fixed asset (or each group of similar fixed assets).

3. Actual major repair costs of fixed assets are directly accounted for as enterprise expenses. For special assets, if actual major repair costs affect the business results improperly, they may be accrued in advance or gradually allocated after obtaining written agreement from the financial authority.

4. All fixed assets in state enterprises (tangible or intangible), regardless of their source of funding, whether subject to basic depreciation or not, must be utilized and managed according to the current fixed asset management system.

5. Until the State revalues fixed assets, state enterprises need to review the original cost of each fixed asset, propose appropriate adjustments to align with the current price level, report to the financial authority for consideration and decision.

6. The following terms in this Circular are understood as follows:

- Tangible fixed assets: These are fixed assets with physical form, meeting the prescribed standards for value and usage period, including: buildings, land, structures, machinery and equipment, transportation means, tools, measuring devices, communication and computing equipment, management-related machinery and equipment, and other tangible assets.

- Intangible fixed assets: These are fixed assets without physical form, representing invested value or rights and privileges of enterprises participating in production and business activities and other activities of state-owned enterprises, such as: establishment costs, production preparation costs, invention patents, trademark rights, land clearance and restoration costs, land use rights, channel dredging and port construction costs, and other intangible assets.

- Leased purchased fixed assets: These are fixed assets acquired through long-term lease contracts paid in installments. Upon completion of the lease term and payment of the total lease amount equal to the value of the leased fixed asset, ownership transfers to the lessee.

- State capital: Capital owned by the State, including: capital invested by the State budget, capital derived from the State budget, and capital supplemented by state enterprises according to State regulations.

II. SPECIFIC PROVISIONS ON THE ESTABLISHMENT OF BASIC DEPRECIATION FUNDS.

1) Fixed assets subject to basic depreciation.

- All fixed assets of state enterprises must be put into use, including both tangible and intangible fixed assets, and must be subject to basic depreciation, recovering the full capital based on accurately and fully recording the original cost of fixed assets.

2) Fixed assets not subject to basic depreciation:

The following fixed assets are not subject to basic depreciation:

- Fixed assets that have been fully depreciated but are still usable.

- Leased fixed assets.

- Bridges, culverts, roads, dikes, forests (except seedling forests, resin-producing forests...), which are part of infrastructure serving common social needs and not directly supporting the production and business activities of a state enterprise.

- Unused fixed assets awaiting relocation or storage for over one year, registered with the financial agency.

- Fixed assets formed from welfare funds of enterprises not directly supporting the production and business activities of the enterprise.

- The value of land or land use rights of the enterprise.

3) Rate of basic depreciation.

Pending revision of the basic depreciation rate, state enterprises continue to apply the basic depreciation rate as per Decision No. 507 TC/DTXD dated July 22, 1986 of the Ministry of Finance and other guiding documents amending and supplementing the basic depreciation rates of the Ministry of Finance.

- For intangible fixed assets: Depreciation is accrued based on the effective period of each type of intangible fixed asset from the date it is put into operation (as per contract, commitment, or usage cycle).

- For leased purchased fixed assets, during the usage period, the lessee must accrue basic depreciation according to the State regulations as a percentage of the original cost of the fixed asset recorded in the lease contract to create a fund for debt repayment.

- For fixed assets that have not yet been fully depreciated but are damaged, the enterprise must report to the financial authority for specific case handling: If due to objective reasons (natural disasters, fires, enemy attacks...), the competent authority may decide to reduce the operating capital or account for the remaining undepreciated value in business expenses. If due to subjective reasons caused by the enterprise or individual, the undepreciated value must be deducted from retained earnings or compensated by the individual.

4) Increase or decrease in the rate of basic depreciation of fixed assets.

a) Increase in the rate of basic depreciation: State enterprises are permitted to increase the basic depreciation rate above the current rate under the condition of not incurring losses in the following cases:

- Fixed assets with rapid technological progress requiring capital for renewal to avoid obsolescence affecting business.

- Enterprises using borrowed capital to construct or purchase fixed assets where the loan repayment period is shorter than the depreciation period of the fixed assets, and after exhausting all legitimate funds within the enterprise (construction investment fund, production development fund...), if there is still a shortfall, the basic depreciation rate can be increased, but it cannot exceed the loan repayment amount stipulated in the loan agreement for the year.

- An enterprise using borrowed funds to construct or purchase fixed assets, where the debt repayment period is shorter than the depreciation period of the fixed assets, and after mobilizing all legitimate sources of capital within the enterprise (construction investment fund, production development fund, etc.) for debt repayment but still falls short, shall be permitted to increase the amount of provision for bad debts, but shall not exceed the amount of debt due for repayment in that year according to the loan agreement.

- The actual working regime of fixed assets exceeds the normal level due to the utilization of machine capacity, overtime shifts, and machine hours to intensify labor and accelerate the process of equipment renewal.

The authority to decide on increasing the extraction for depreciation of fixed assets is stipulated as follows:

+ If the increased extraction rate does not exceed 20% compared to the basic extraction rate, the enterprise director decides and reports in writing to the financial authority.

+ If the increased extraction rate exceeds 20% compared to the basic extraction rate, the enterprise must submit a plan to the financial authority for consideration and decision.

b) Reducing the basic depreciation extraction rate: In principle, state-owned enterprises must comply with the provisions at points 1, 2, and 3 of Section II above: They may not reduce the depreciation extraction rate for existing fixed assets. For some fixed assets invested by the State before 1990 that are no longer suitable for production and business operations under the market mechanism, if the depreciation extraction of these fixed assets leads to losses, the financial authority will consider reducing the depreciation extraction rate for each specific case (but not exceeding the incurred loss) based on the enterprise's proposal. If these fixed assets belong to borrowed funds or raised capital, the enterprise decides on reducing the depreciation extraction rate but must ensure timely debt repayment according to the agreement, contract (or commitment).

III. USE OF BASIC DEPRECIATION CAPITAL

1) Implement Article 5 of Decision No. 51/TTg dated January 21, 1995 of the Prime Minister: From January 1, 1995, state-owned enterprises retain the entire basic depreciation capital of fixed assets from state-owned sources for investment, replacement, and modernization of fixed assets.

Annually, state-owned enterprises and their supervisory authorities must register investment plans from retained basic depreciation capital with state planning agencies and financial authorities for procedural checks, investment targets, and monitoring of implementation.

2) Basic depreciation capital of fixed assets financed through bank loans and other domestic and foreign borrowings: State-owned enterprises may use it to create capital for debt repayment; after repaying the debt, if the asset continues to be used, no further depreciation shall be extracted according to Point 2, Section II of this Circular.

3) State-owned enterprises using basic depreciation capital for construction investments must comply with the management regulations for investment and construction issued together with Decree No. 177/CP dated October 20, 1994 of the Government.

4) State-owned enterprises may use retained basic depreciation capital for business operations when there is no immediate need for investment, in accordance with the law, but they must preserve the capital, pay usage fees, and promptly return the capital when there is a need for investment or upon a mobilization decision by the competent authority.

IV- MOBILIZATION OF BASIC DEPRECIATION CAPITAL OF FIXED ASSETS.

1- Mobilization of retained basic depreciation capital applies within the scope of economic-technical sectors organized under the holding company model: Depending on the specific situation of member enterprises and concentrated investment requirements for industry development, the Board of Directors of the Holding Company may decide to mobilize the basic depreciation capital of fixed assets extracted by member enterprises in the year to establish an investment fund for the Holding Company to invest centrally in development projects within the industry.

2- Member enterprises whose basic depreciation capital is mobilized shall have the capital and interest returned by the Holding Company: The interest rate paid to enterprises whose basic depreciation capital is mobilized is determined by the Board of Directors of the Holding Company based on the General Director's proposal, but it must not be lower than the average annual inflation rate published by the State and the usage fee. Enterprises whose basic depreciation capital is mobilized still bear the responsibility to pay usage fees to the state budget and preserve the capital according to current regulations.

3- The source for repaying the principal and interest to enterprises whose basic depreciation capital is mobilized comes from the depreciation of new investment projects and their profits. During the investment period, if the project has not yet generated benefits, the principal and interest can be repaid from borrowed funds to enterprises whose basic depreciation capital is mobilized.

V. SETTLEMENT OF BASIC DEPRECIATION CAPITAL

Annually, state-owned enterprises (including holding companies) must settle the extraction, use, and mobilization of basic depreciation capital with the state financial authority along with the settlement of production and business activities.

This Circular takes effect from January 1, 1995./.