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According to “Accountancy, Taxes and Law”, the Ministry of Finance of the Russian Federation prepared a set of amendments to the 25th section of the Internal Revenue Code which may dramatically change rules of depreciation in Russian accounting practice. The project has already been presented to the Ministry for Economic Development and Trade for it further consideration. The finance ministry plans to spread its new rules on all companies’ property that is subject to amortization or depreciation, including the property which was put in use before January 1st 2009. 

If the project is approved, starting from the very beginning of the next year, non-linear depreciation methods will be applied to all tangible and intangible assets (one should note here that this method is rarely applied in Russian practice). Only buildings and intangible assets included in the 8th-10th depreciation groups*, will be subject to exception – for these items, formerly employed linear depreciation method will be used. 

Another important innovation is the order to determine the monthly amortization amount in case of the non-linear method. As compared to the one currently employed, only the main principle is the same (namely, monthly amortization amount is determined basing on an object’s residual value; at very beginning of that object’s useful life, major part of its value goes to expenses in P&L). Except for that, everything’s going to be a bit different.

With the non-linear depreciation method, amortization amounts will be calculated for a group of items and not for each and every separate item as it is done now. For that, a new notion of “an amortized group’s consolidated balance” is introduced. This notion stands for a total residual value of all items within a group. In order to determine the monthly amortization amount, one should multiply a group’s consolidated balance by the rate of depreciation. 

A defined rate of depreciation will be stipulated in the Internal Revenue Code of the Russian Federation – one for each and every separate depreciation group. For instance, for the 1st depreciation group**, this rate will be set at 10%, for the second depreciation group*** - 9%, and so on, 1 percent less for each subsequent depreciation group.

As a result, there will be differences in financial and tax accounting (unless the regulators take care of simultaneous changes in rules of financial accounting). Nonetheless, companies will be pleased by the new approach because it will allow them to write-off the value of their property as expenses much faster. This already follows from the very nature of the non-linear method, but in addition to that, monthly depreciation rates will increase. Take the 3rd depreciation group as an example (which is property with the useful life of 3 to 5 years) – its current rate of depreciation varies from 3.33 to 5.4 percent, while starting from 2009, it will be set at 8%.

These are some other planned changes as well.

For instance, it will soon be allowed to:

1. Totally write-off subsistence allowances;
2. Recognize losses occurred through selling of shares;
3. Amortize expensive transport without the reduction factor equal to 0.5.

It will be prohibited to:

1. Recognize payments going to the board of directors as losses in P&L accounts;
2. Charge bonus (premium) amortization for tangible assets acquired by a subsidiary from its parent company if the latter holds more than 50% of its subsidiary’s shares;
3. Use the amortization coefficient equal to 3 for lease property of the 1st-3rd depreciation groups.

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• *According to the Internal Revenue Code, the 8th depreciation group is formed out of property with the useful life of 20 to 25 years. The 9th depreciation group includes property with the useful life of 25 to 30 years – and above 30 years in case of the 10th depreciation group
• **Short-living property items with the useful life of 1-2 years
• ***…2-3 years