Account 305- Depreciation of fixed assets

1. Accounting principles:

a) This account shall deal with any increase or decrease in the depreciation and cumulative depreciation value of fixed assets during their useful life owing to fixed asset and other increases, decreases or depreciations in fixed assets;

b) In principle, all fixed assets of a microfinance institution used for business purposes (even including assets not yet put to use, unnecessary and awaiting liquidation) must be depreciated according to applicable regulations. Depreciation of fixed assets used for business purposes shall be accounted for as operating expenses during an accounting period; depreciation of fixed assets not yet put to use, unnecessary and awaiting liquidation shall be recorded as other expenses. In special cases where depreciation is not required, microfinance institutions shall have to comply with applicable laws. In cases where fixed assets are used for operating projects or welfare purposes, their depreciation shall not be accounted for as operating expenses but as depreciation of fixed assets, and shall be recorded as a decrease in funding for formation of these assets;

c) Based on regulations of laws and administrative requirements of a microfinance institution, accountants may decide on a depreciation method in compliance with legislative regulations which is appropriate for each fixed asset in order to boost business operations, ensure the fast and full recovery of capital and relevance to the capability of covering costs of that microfinance institution.

The depreciation method applied to each fixed asset must be consistent and may be changed whenever there is any significant change in the method of recovery of economic interests of a fixed asset.

d) The depreciation period and the fixed asset depreciation method must be reviewed at least the end of each fiscal year. If the estimated useful life of an asset has a vast difference from the previously estimated one, the depreciation period must be changed accordingly. The fixed asset depreciation method may be changed whenever there is any significant change in the method of estimation of recoverability of economic interests from a fixed asset. If this case happens, adjustments in depreciation costs in the current and subsequent years shall be required, and must be explained in financial statements;

dd) If a fixed asset has been fully depreciated (capital invested in it has been fully recovered), but is still in use for business purposes, depreciation on such asset shall not be continued. Meanwhile, if a fixed asset not yet fully depreciated (capital invested in it fully recovered) has been damaged or needs to be liquidated, it shall be mandatory to determine causes of that situation and responsibilities of the collective or individual for the purpose of charging compensations and claiming the remaining value of the asset not yet recovered, and if any compensation is not made, use proceeds from liquidation of such asset as compensations of which the amounts are subject to the decision granted by the microfinance institution’s leadership;

e) As for intangible fixed assets, depending on their useful timelength, depreciation thereof may begin from the date of commencement of their use (specified in a contract, a commitment or a decision of a competent entity). In particular, depreciation on intangible fixed assets which are rights to use land shall be allowed only if the period of use thereof is determined. Otherwise, such depreciation shall not be allowed;

g) As for fixed assets hired under finance leases during their useful life, lessees must charge depreciation on these assets within the lease term as expenses or security for the full recovery of investment capital in these assets.

2. Account 305 can be subdivided into tier-2 accounts, including:

3051- Depreciation of tangible fixed assets

3052- Depreciation of intangible fixed assets

3053- Depreciation of fixed assets hired under finance leases

3. Structure and entries of the account 305:

Debit side: – Depreciated value of fixed assets decreased due to liquidation sale, disposal or transfer thereof to other business entities or use of them as capital contributions to other entities.

Credit side: – Depreciated value of fixed assets increased due to depreciation of these assets.

Credit balance: – Cumulative value of depreciation of fixed assets existing at a microfinance institution.

Detailed accounting: Accountants can use subaccounts designed for recording respective fixed assets.