Often fixed assets are temporarily not used due to various circumstances, such as major repairs, improvements, etc. What is with fixed assets depreciation How to deal with PPE depreciation during such business interruption of entities that keep records based on NAS?
Basic rules
Depreciation is being charged throughout the useful life (exploitation) of an object set up by an enterprise/institution (executive directive) when the object is recognized as an asset (if placed on the balance sheet), and is suspended for the period of its reconstruction, modernization, completion, refurbishment and preservation (i. 23 NAS 7).
Depreciation is deducted from the month following the month of the disposal of the fixed assets, transferring it for reconstruction, modernization, completion, refurbishment, preservation. Depreciation used when applying production method is terminated from the date that comes after the date the fixed assets are disposed of.
Conclusion 1
It is not required to suspend depreciation during repair. That means, it can be counted even when the object is decommissioned for repair. Item 23 NAS 7 contains a clear and exclusive list of cases of depreciation cessation which does not indicate repair or temporary decommissioning.
Conclusion 2
There is no reason to suspend depreciation during the temporary decommissioning of fixed assets. That is, it is charged (unless it is a matter of conservation).
Conclusion 3
Depreciation is suspended for the period of:
- reconstruction;
- modernization;
- completion;
- additional equipment;
- conservation.
This is the requirement contained in i. 23 NAS 7.
However, if an object is exploited (i.e. not decommissioned) during improvements, then depreciation can be calculated during this period. The Ministry of Finance also stated this (letter No. 31-34000-10-9/31548 dated August 12, 2008,). The court also considered whether the facility is exploited during the improvement. In case it is exploited the depreciation is charged (the decision of the Odessa district administrative court of November 27, 2017 in case No. 815/2944/17, the decision of Kirovohrad district administrative court of August 30, 2016 in case No. П/811/4187/14). For example, during the warming of the facade of the office (to save on heating, which is regarded as an increase in the expected future economic benefits, i.e. as an improvement), the premises are used, ie the office is not decommissioned and therefore no depreciation is necessary.
Conclusion 4
Temporary non-use of fixed assets (whether due to repair, improvement or business interruption) does not automatically make it a “non-productive fixed asset”. This is important because in tax accounting, non-productive fixed assets are not depreciated (subpar. 138.3.2 of the Tax Code of Ukraine, hereinafter – TCU).
Earlier (until January 1, 2017 according to the old wording of subpar. 138.3.2 of the TCU), the temporary decommissioned fixed assets, even due to repair or business interruption were considered “non-operational” (non-productive) by tax authority even letters (tax letters dated No. 1468/6/99-99-15-02-02-15 January 25, 2017 and No. 11385/6/99-99-19-02-02-15 dated June 2, 2015). And on that basis, they referred to their tax depreciation. However, in court it was possible to defend the feasibility of such fixed assets (decision of the Supreme Administrative Court No. K/800/56497/14 of August 19, 2015,).
As of January 1, 2017, non-productive fixed assets are those that are “not intended for use in the taxpayer activity” (former “not used”). Therefore, the temporary non-use of fixed assets in business activities does not mean that they are non-productive. Suspension of their use (decommissioning) does not change their status if such fixed assets are intended for use in business activities.
This is also understood by controllers, so they do not use such an argument for lack of depreciation. Although there are explanations, which have not yet departed from the old practice (Individual tax advice of the State Tax Service of Ukraine № 1080/6/99-99-15-02-02-15/ІПК dated March 19, 2018, ITA of the main department of SFSU in Dnipropetrovsk region, No. 3828/ІПК/04-36-12-32-20 dated September 04, 2018).
However, the temporary non-use = “non-productive” argument is not currently used. There is now a better reason: temporary non-use = “not useful life (exploitation)”.
Such fixed assets are usable but temporarily not exploited (i. e., the useful life lasts, but does not terminates).
Under NAS 7, depreciation is charged over the useful life (operation) of an asset set up by an enterprise/entity (executive director) when it is recognized as an asset (if it is credited to a balance sheet). And there is no hint that temporary non-use is not a useful life.
Therefore, if an enterprise order specifies, for example, that the useful life of a car is five years, it is during this period the car is depreciated and temporary non-use is included in the useful life of such fixed asset.
Conclusion 5
Due to the explanation by the controllers, the temporary non-use of fixed assets (whether due to repair, business interruption or improvement) will not be considered by the tax authorities to be useful life. Therefore, in their opinion, the depreciation on such an object during this period should not be charged.
NAS does not contain such information. Item 23 NAS7 contains a clear list of cases of depreciation suspension.
