COSTS INCURRED AFTER INITIAL RECOGNITION

23. The costs incurred after the initial recognition of tangible fixed assets shall be recorded as increase in their historical cost if these costs are certain to augment future economic benefits obtained from the use of these assets. Those incurred costs which fail to meet this requirement must be recognized as production and business expenses in the period.

24. The costs incurred after the initial recognition of tangible fixed assets shall be recorded as increase in their historical cost if these costs have practically improved the current conditions of the assets as compared to their original standard conditions, such as:

a/ Replacing parts of the tangible fixed assets, thereby prolonging their useful life or increasing their use capacity;

b/ Renovating parts of the tangible fixed assets, thereby considerably improving the quality of manufactured products;

c/ Applying new technological production processes, thereby reducing the operational costs of the assets.

25. The repair and maintenance costs of tangible fixed assets for the purpose of restoring or sustaining their capability to bring about economic benefits as in their original operating conditions shall be included into production and business expenses in the period.

26. The accounting of the costs incurred after the initial recognition of tangible fixed assets must be based on each particular case and the recoverability of these costs. When the residual value of the tangible fixed assets has already been composed of reductions in economic benefits, those costs incurred afterwards to restore economic benefits from these fixed assets shall be included in the historical cost of the fixed assets if their residual value does not exceed their recoverable value. Where the buying price of a tangible fixed asset has already covered the enterprises’ obligation to incur those costs for putting the assets into the ready-for-use state, the capitalization of the costs incurred afterwards must be also based on the recoverability of these costs. For example, an enterprise buys a house which needs some repair before it can be used. The house repair cost shall be included in the historical cost of the asset if such cost is recoverable from the future use of the house.

27. Where some parts of tangible fixed assets need to be replaced on a regular basis, they shall be accounted as independent fixed assets if they satisfy all the four (4) criteria of a tangible fixed asset. For example, air-conditioners in a house may be replaced many times throughout the useful life of the house. The costs incurred in the replacement or restoration of these air-conditioners shall be accounted as an independent asset and the value of the replaced air-conditioners shall be recorded as a decrease.

DETERMINATION OF VALUE AFTER INITIAL RECOGNITION

28. After initial recognition, during their use process, tangible fixed assets shall be determined according to their historical costs, accumulated depreciation and residual values. Where they are re-appraised according to the State’s regulations, their historical cost, accumulated depreciation and residual value must be adjusted according to the re-appraisal results. The difference resulting from the re-valuation of tangible fixed assets shall be handled and accounted according to the State’s regulations

DEPRECIATION

29. The depreciable value of tangible fixed assets shall be allocated systematically during their useful life. The depreciation method must be suited to the economic benefits yielded by the assets to the enterprises. The depreciated amount of each period shall be accounted into the production and business expenses in the period, unless they are included in the value of other assets, such as depreciation of tangible fixed assets used for activities in the development stage is a cost component of the historical cost of intangible fixed assets (according to the regulations of the standard intangible fixed assets), or the depreciation cost of tangible fixed assets used in the process of self-constructing or self-making other assets.

30. Economic benefits yielded by tangible fixed assets shall be gradually exploited by the enterprises through the use of these assets. Nevertheless, other factors, like technical backwardness, wear-and-tear of these fixed assets due to their non-use, often cause reductions in the economic benefits which the enterprises expect these assets would bring about. Therefore, when determining the useful life of tangible fixed assets, the following factors must be taken into account:

a/ The extent of use of such asset, estimated by the enterprise. The extent of use is assessed according to the estimated capacity or output;

b/ The extent of wear-and-tear, depending on the related elements in the asset’s use process, such as the number of working shifts, the enterprise’s repair and maintenance of the asset as well as its upkeep when not in operation;

c/ Invisible wear-and-tear arising from the replacement or renovation of the technological chain or changes in the market demand for the products or service turned out by the asset;

d/ Legal constraints in the asset use, such as the date of expiry of the contract of financial-leasing fixed assets.

31. The useful life of tangible fixed assets shall be determined by the enterprises mainly on the expected use extent of the assets. However, due to the asset management policy of the enterprises, the estimated useful life of fixed assets may be shorter than their actual useful life. Therefore, the estimation of the useful life of a tangible fixed asset must be also based on the enterprise’s experiences on assets of the same type.

32. Three methods of depreciation of tangible fixed assets are:

– Straight-line depreciation method;

– Declining-balance depreciation method; and

– Units-of-output depreciation method.

By the straight-line depreciation method, the annual depreciation amount is kept unchanged throughout the useful life of assets. By the declining-balance depreciation method, the annual depreciation amount gradually declines throughout the useful life of assets. The units-of-output depreciation method is based on the estimated total quantity of product units the assets may turn out. The depreciation method applied by the enterprises to each tangible fixed asset must be implemented consistently, except where appear changes in the mode of its use.

The enterprises must not continue depreciating tangible fixed assets which have been entirely depreciated but still used for production and business operations.