Regarding depreciation in tax accounting of fixed assets located in the temporarily occupied territory

Press service of the State Tax Service of Ukraine, published 03 May 2023 at 13:43 Chapter: News

State Tax Service of Ukraine reminds that the Ministry of Finance of Ukraine provided explanation in letter dated № 41010-06- 62/23254 as of 10.10.2022, which is posted on web portal of the State Tax Service (https://tax.gov.ua/en/new-about-taxes--news-/629167.html).

Ministry of Finance in its explanation notes that in order to ensure reliability of accounting and financial reporting data, enterprises are required to conduct inventory of assets and obligations, during which their availability, condition and valuation are checked and documented.

In order to comply with procedure for inventory conduction, the one should be guided by the Regulation on inventory of assets and obligations, approved by Order of the Ministry of Finance of Ukraine № 879 as of 02.09.2014 and Procedure for submitting financial reporting, approved by Resolution of the Cabinet of Ministers of Ukraine № 419as of 28.02.2000.

Non-convertible assets and stocks, which were reflected in accounting before introduction of the martial law and which, as of the date of compiling financial reporting, are actually located in the temporarily occupied territory or in areas of military (combat) operations, continue to be accounted for as a part of the enterprise’s assets.

At the same time, enterprise must assess negative impact of changes in the economic and legal environment and recognize amount of losses from the impairment of non-convertible assets until conditions for access to such assets, inventory conduction and decision-making on their write-off or restoration of usefulness.

Herewith, enterprises that are located in the areas of military (combat) operations and apply national accounting regulations (standards) for accounting, identified as a result of inventory of shortages, loss or destruction of non-convertible assets and stocks on the basis of properly executed documents are reflected in the enterprise’s expenses.

Information on the lack of access to assets and primary documents of the enterprise is noted in notes to financial reporting.

Procedure for calculating depreciation of fixed assets or intangible assets in tax accounting for determining the subject of corporate income taxation is established by Paragraph 138.3 Article 138 of the Tax Code of Ukraine (hereinafter – TCU).

Calculation of depreciation of fixed assets and intangible assets is carried out according to national accounting regulations (standards) or international financial reporting standards, taking into account restrictions established by the TCU.

Calculating depreciation of non- convertible assets according to Paragraph 138.1 Article 138 of the TCU, the income tax payer increases financial result before taxation by the amount of accrued depreciation of fixed assets and/or intangible assets according to national accounting regulations (standards) or international financial reporting standards.

On the basis of Paragraph 138.2 Article 138 of the TCU, financial result before taxation is reduced by the amount of calculated depreciation of fixed assets and/or intangible assets according to Paragraph 138.3 Article 138 of the TCU.

Therefore, Sub-paragraph 138.3.2 Paragraph 138.3 Article 138 TCU stipulates that expenses for acquisition/independent production of non-production fixed assets are not subject to depreciation and are carried out at the expense of relevant sources, as well as costs of their repair, reconstruction, modernization or other improvements.

Non-production fixed assets are fixed assets that are not intended for use in economic activity of the corporate income tax payer.

In addition, in tax accounting, depreciation is not calculated for the non-use period (exploitation) of fixed assets in economic activity in connection with their conservation.

As follows, if fixed assets intended for use in economic activity of the income tax payer are located in the temporarily occupied territory or in areas of military (combat) operations and depreciation of such assets is calculated according to national accounting provisions (standards) or international financial standards reporting in accounting does not stop, then such fixed assets can be depreciated during such period in tax accounting according to requirements of Paragraph 138.3 Article 138 of the TCU.

In case that the income tax payer recognizes amount of losses due to the impairment of such assets before conditions for access to non-convertible assets (fixed assets) are reached based on the assessment results of negative impact of changes in the economic and legal environment, then such payer, guided by Paragraph 138.1 Article 138 of the TCU, increases financial result before taxation by the amount of losses from the impairment of such fixed assets included in expenses of the reporting period according to national accounting regulations (standards) or international financial reporting standards.