Circular No. 94-TC/CN guiding the system for setting aside and using basic depreciation funds (BDF) at state-owned enterprises

CIRCULAR

OF THE MINISTRY OF FINANCE NO. 94-TC/CN ON NOVEMBER 11, 1993 GUIDING
REGIME FOR WITHDRAWAL AND USE OF CAPITAL FOR DEPRECIATION AT ENTERPRISES
STATE ENTERPRISES

The Ministry of Finance has issued regulations guiding and using capital for depreciation at State-owned enterprises:

- Decision No. 507-TC/ĐTXD dated July 27, 1986 of the Ministry of Finance stipulates the regime for managing depreciation of fixed assets and sets standard rates of depreciation for fixed assets (to be supplemented and amended with depreciation rates for fixed assets).

- Circular No. 33 TC/CN dated September 1, 1989 guides the amendment to the regime for submitting capital for depreciation of economic organizations and state-owned enterprises into the State budget according to Decision No. 93/HĐBT dated July 24, 1989 of the Council of Ministers.

- Circular No. 33 TC/CN dated July 31, 1990 stipulates the regime for depreciation of fixed assets.

- Circular No. 34 TC/CN dated July 31, 1990 guides the transfer, leasing, sale, and liquidation of fixed assets.

- Circular No. 31 TC/CN dated May 27, 1991 and Circular No. 82 TC/CN dated December 31, 1991 guide the regime for preserving and developing capital.

Now, to ensure uniform application of the regime and to meet new requirements for expanding and developing production and business operations of enterprises, the Ministry of Finance guides certain amendments and supplements to the regime for withdrawal and use of capital for depreciation as follows:

I. WITHDRAWAL OF CAPITAL FOR DEPRECIATION

1. The basis for calculating the amount of capital for depreciation of enterprises is:

- The original cost of fixed assets must be accurately calculated according to the annual preservation of capital approved.

- The rate of capital for depreciation is calculated according to the provisions of the State (according to Decision No. 507 TC/ĐTXD dated July 22, 1986 of the Ministry of Finance) and other documents and guidance for amending and supplementing the rate of capital for depreciation issued by the Ministry of Finance.

2. State-owned enterprises experiencing difficulties in business operations resulting in losses but not requiring dissolution shall prepare a report explaining the causes of the losses and measures to address them to the superior management authority and the financial management agency at the same level (Ministry of Finance for centrally-administered state-owned enterprises and Department of Finance for locally-administered state-owned enterprises).

The financial management agency overseeing state-owned enterprises will consider and decide on reducing the rate of capital for depreciation based on the enterprise's proposal and the opinion of the superior management authority.

The principle for reducing the rate of capital for depreciation is:

- The reduction of the rate of capital for depreciation will not be considered if the enterprise's average wage for workers exceeds the approved unit price.

- Capital for depreciation can only be reduced when losses occur during the year due to objective reasons accepted by the State.

- The maximum reduction allowed is 50% compared to the normal rate under the regime.

3. Conversely, enterprises that borrow from banks or other sources to purchase or acquire fixed assets, including cases of purchasing or leasing fixed assets where the depreciation period of fixed assets is longer than the repayment period, may increase the rate of capital for depreciation to create a source for debt repayment. Based on the enterprise's proposal, the financial management agency overseeing the enterprise (Ministry of Finance for centrally-administered enterprises and Department of Finance for locally-administered enterprises) will consider and decide specifically on the increased rate of capital for depreciation after receiving the opinion of the superior management authority.

The principle for increasing the rate of depreciation is:

- The repayment period for borrowed funds must be shorter than the prescribed depreciation period for fixed assets.

- Depreciation can only be increased to a level sufficient to ensure production does not incur losses and does not exceed the repayment period for borrowed funds.

- Accelerated depreciation is applied to fixed assets acquired through borrowing. If fixed assets have been fully depreciated but continue to be used, their remaining value must be reassessed and continued to be depreciated normally in the product cost.

The remaining revalued value must be allocated into state capital and self-supplemented capital corresponding to the profit distribution ratio (tax rate) of the enterprise and managed according to current regulations.

In cases where enterprises utilize excess capacity of machinery and equipment, increase machine shifts and hours to enhance labor productivity, accelerate equipment renewal, and address intangible depreciation of fixed assets, the enterprise shall report to the superior management authority and the financial management authority at the same level. The financial management authority (after receiving the proposal from the superior management authority) will decide specifically on allowing the enterprise to increase depreciation rates corresponding to the increased machine shifts and hours of fixed assets. The fundamental principle for handling increased depreciation rates in this case is not to reduce the profit margin per unit product and not to decrease the tax income submitted to the state budget compared to the situation without increased labor productivity and maintaining the normal depreciation rate as prescribed.

The increase or decrease in depreciation rates in the above cases will be determined and officially settled together with the annual settlement approval of the enterprise.

4. In cases where fixed assets have been preserved and have reached their design service life and have been fully depreciated but are still in use due to good maintenance by the enterprise, the enterprise must establish a committee to reassess the residual value of the asset to continue allocating depreciation into production costs (including depreciation of supplementary capital if there is a need for supplementary capital). The residual value and the supplementary capital from depreciation will be considered as self-supplemented capital for reinvestment in fixed assets of the enterprise, including cases where the previous fixed assets were invested using state capital (except for cases where the fixed assets are fully depreciated due to low initial valuation or low foreign exchange rate previously set by the State).

If the enterprise sells off and liquidates these assets, the entire proceeds will be placed into the fund for encouraging production development for reinvestment in fixed assets.

II. USE OF DEPRECIATION CAPITAL

The State uses part of the depreciation capital to repay foreign debts under Government Agreements, while reserving another portion for reinvesting in fixed assets to maintain and develop the production capacity of enterprises. Based on this principle, the use of depreciation capital is regulated as follows:

1. The use of depreciation capital is carried out based on classifying state-owned enterprises.

a. Due to production technology characteristics, state-owned enterprises in certain industries (such as large hydroelectric power plants) that do not have regular annual needs for investment to maintain production capacity or renew production lines within the enterprise (but usually accumulate funds over a long period for new projects) must submit 100% of depreciation capital into the state budget (excluding the depreciation capital of fixed assets purchased by the enterprise using its own production development encouragement fund or self-financed loans) to create centralized investment capital for the State in those industries.

For individual or auxiliary equipment outside the main production line, these enterprises must mainly maintain and develop their production capacity through bank credit or other loans and retained profits (production development encouragement fund...).

b. Enterprises initially funded by the state budget (including government loans and aid) that have completed construction and started production within 15 years or less may retain 50% of the depreciation capital of fixed assets formed from budgetary funds for reinvestment in fixed assets. The remaining depreciation capital of fixed assets from the budget (50%) must be deposited into a separate account at the National Treasury and can only be used for reinvestment in fixed assets according to the annually approved national investment plan.

c. State-owned enterprises in coal mining, fertilizer production, ceramic glass, jute processing, agriculture, livestock, and other enterprises not included in types 1 and 2 mentioned above, including enterprises initially funded by the state budget that have been established and started production for more than 15 years; newly established state-owned enterprises (under 15 years) based on splitting or merging from old enterprises or transferring old fixed assets, even if the enterprise later purchases additional fixed assets, all belong to type 3 and may retain 100% of the depreciation capital of fixed assets from the budget for use in maintaining and developing production capacity.

The basic depreciation capital retained at the enterprise must still be strictly managed: records must track allocations, usage plans require approval, expenditures must comply with current regulations, and reports and increases in fixed asset values upon completion of projects must be documented. Enterprises are strictly prohibited from misusing basic depreciation capital.

2. The state-owned enterprise financial management authority (Ministry of Finance for central enterprises and Provincial Finance Departments for local enterprises) leads the classification of enterprises into the three aforementioned categories in collaboration with relevant ministries and sectors, and annually informs the tax authorities about adjustments between categories of enterprises for implementation and supervision of state budget revenue collection.

After classification, enterprises are obligated to submit state budget payments according to the above regulations.

In cases where enterprises must submit depreciation capital to the state budget according to the above regulations and have approved plans for construction investment using budgetary funds, they may retain the corresponding depreciation capital to be submitted and the financial authority will promptly record the receipt and expenditure according to the current procedures for providing investment capital for construction. The remaining difference must be promptly submitted to the state budget or the budget may provide additional investment capital according to the prescribed procedures.

III. IMPLEMENTATION PROVISIONS

1. From now until the end of 1993, enterprises must complete the classification declaration form for state-owned enterprises according to the model attached to this Circular, and by January 1994, the Ministry of Finance and Provincial Finance Departments must complete the notification of the classification regulations to enterprises.

2. This Circular shall take effect from the date of issuance and be applied to calculate the amount of retained earnings to be remitted to the State budget from January 1, 1994 for all central and local state-owned enterprises.

3. All previous provisions in Circulars issued by the Ministry of Finance or other sectors at various levels that conflict with this Circular are hereby abolished.

In the course of implementation, if there are difficulties or obstacles, they shall be reported to the Ministry of Finance for timely resolution.

ANNEX

APPLICATION FOR REGISTRATION AND DECISION ON CLASSIFICATION OF STATE-OWNED ENTERPRISES BASED ON CRITERIA FOR RETAINED EARNINGS ALLOCATION AND USE

1. Enterprise name:

(address, telephone, telex, fax):

2. Supervising authority:

(Ministry of Finance, General Department, Ministry, Department, Provincial People's Committee directly under the Government)

3. Summary of enterprise formation history:

(Name of investment construction project, start-up date and production commencement date, source of investment capital, division or merger of enterprises).

4. Decision on establishment of enterprise according to Decision No. 388 (number, day, month, year)...

5. Structure of Fixed Assets as of the beginning of 1993:

Total original value of Fixed Assets:

Of which: - In use for business operations

- Not in use, need to be relocated.

- Pending liquidation.

In total Fixed Assets:

- Buildings and structures.

- Machinery and technological equipment.

- Means of transport.

- Other Fixed Assets.

6. Value of Fixed Assets and Depreciation of Fixed Assets:

As of the beginning of 1993

Of which

(thousand dong/year)

State Capital - Self-supplemented Capital - Borrowed Capital

- Original value of Fixed Assets

- Depreciation of Fixed Assets

- Fixed Capital

Average Retained Earnings Contribution Rate for Fixed Assets

Amount of Retained Earnings Contribution (absolute amount) 1993

7. Decision on classification of enterprises regarding the use of retained earnings contribution capital by the financial management authority (Ministry, Department of Finance) after receiving comments from the supervising authority (Ministry, Department of Management).