XVI Международная студенческая научная конференция Студенческий научный форум - 2024

Introduction

Depreciation policy is one of the key elements of the company's financial strategy and directly affects its financial condition and business efficiency. Despite the fact that depreciation payments are not direct expenses on production of goods and services, they have a significant impact on the company’s financial performance and its competitiveness.

Depreciation policy is a strategy for managing fixed assets, integrating the appropriate choice of the optimal time and method of its implementation. It is aimed at ensuring the stable functioning of the enterprise, preserving its fixed assets and reducing the maintenance costs [1]. It includes the choice of depreciation methods, determination of useful life of assets, adjustment for inflation and taxation. It also affects the value of the company and depreciation charges recorded in the financial statements [2].

Research aim

The purpose of this study is to analyze the impact of depreciation policy on the efficiency of business activities of suburban passenger company Express-Prigorod, as well as to develop recommendations for optimizing depreciation charges and improving production efficiency.

Materials and methods

The research issues relatively depreciation influence on the economic behaviour of modern companies have been actively discussed in the theoretical and empirical literature for several decades.Many Russian and foreign studies have revealed benefits and drawbacks of the existing methods of depreciation depending on the company’s core activity, tax policy and financial strategy.

Coen R.M. (1975) explores depreciation patterns through the behaviour of investment expenditures. He compares the straight-line depreciation with the accelerated depreciation [3]. 

Jorgenson D.W. (1996) conducted empirical research on depreciation using an econometric model of asset prices. He developed an integrated system of product, income and wealth accounts [4]. 

Russian researcher Antonov S.V. considers the issues of planning and carrying out depreciation deductions, their impact on the company’s activities and tax burden. He analyzes depreciation methods, their advantages and disadvantages, in terms of current regulations and changes in legislation on depreciation policy [5].

Kontsipko N.V. defines the depreciation policy of an industrial corporation as “its own source of financing for the extended reproduction of fixed assets of the enterprise” [6]. The author argues that an effective depreciation policy provides constant increase in the company’s own sources of reinvestment.

Ermilina D.A. and Remezova M.Y. discuss depreciation policy as a key condition for ensuring financial stability and development of the company. They emphasize that a properly chosen and implemented depreciation policy can help reduce the tax burden, increase investment in fixed assets and enhance competitiveness.

Depreciation policy is also an important element of financial management of an enterprise, which is aimed at improving its financial stability and efficiency. It should be developed taking into account the specific conditions and needs of the enterprise, as well as legislative requirements and regulations [7].

The main instruments of the company’s depreciation policy include the following ones:

1. Setting certain depreciation periods for different types of assets, for example, for buildings, machinery and equipment, vehicles, etc. In addition, such depreciation methods as linear, accelerated, progressive and others can be used. Such a policy allows organizations to optimize their tax payments, monitor financial flows and manage their resources more efficiently.

2. Grouping of assets by terms of use and depreciation. For example, a company can divide its equipment into categories such as computers, mobile devices, industrial equipment, etc. and set different depreciation periods for each category. This will allow the company to reduce the tax base by increasing depreciation charges on assets that wear out more quickly.

3. The choice of the method for estimating the value of assets, on the basis of which depreciation is calculated. For example, a company may use the evaluation method.

The basic principles of depreciation policy that enable to determine the period of use of tangible assets and their residual value are presented in Figure 1.

Figure 1 – Basic principles of depreciation

There are several methods of depreciation that determine how the value of assets can be allocated over a certain period of time:

1. The straight-line method is one of the most commonly used ones. It is used by about 70% of enterprises. The popularity of the straight-line method is due to the ease of its use. The straight-line method for depreciation implies the write-off of the cost of a fixed asset in the equal proportional parts throughout the entire useful time of the asset [8].

One of the advantages is that the legislation allows using this method both for accounting and tax purposes. This helps avoid discrepancies according to Regulation on Accounting (PBU) 18/02. The straight-line method is convenient to use when an asset is expected to generate the same income over its entire service life.

However, the straight-line method has drawbacks. It is not suitable for equipment that quickly becomes obsolete, since a uniform write-off of its cost does not guarantee efficient allocation of resources needed for replacement. The productivity of production equipment decreases each year, which leads to an increase in maintenance and repair costs. At the same time, depreciation is written off evenly, in the equal amounts as at the beginning, since the straight-line method does not change this. As a result, the total amount of property tax for the entire service life of the amortized by the straight-line method is higher than when using non-linear methods.

2. Using the declining balance method, the annual amount of depreciation deductions is determined based on the residual value of the fixed asset at the beginning of the year and the depreciation rate is calculated depending on the useful life of this asset. This method suggests that the share of depreciation deductions attributed to the cost of production would decrease with each subsequent year of operation of the specified asset.

This method has a number of advantages, since in the first years depreciation is accrued in a larger amount. Therefore, the cost of the fixed asset is recovered faster. The use of this method is reasonable if the fixed assets used in the production process at the enterprise are more subject to moral deterioration.

An undoubted disadvantage is the rise in the cost of manufactured products (works, services) in the first years, since it is during these years that depreciation charges are maximum. Depreciation is included in the cost, so in the first years the cost of production is overstated, every year it will decrease gradually. The write-off of the cost of the fixed assets is proportional to the volume of production.

3. The units of productionmethod of depreciation refers to writing off the cost in proportion to the volume of products (works). It implies the accrual of depreciation charges based on the natural indicator of the volume of production (works) in the reporting period and the ratio of the first [9].

The advantages of this method include the fact that it is nonlinear. It is reasonable to use this method when depreciation of fixed assets is directly related to the frequency of their use. If we discuss the disadvantages, it should be noted that it is not always easy to determine the volume of production produced by each individual asset, especially when the number of fixed assets used is large. This can cause difficulties both in determining the volume and occurrence of additional monthly labor costs.

Therefore, the largest enterprises use the straight-line method of depreciation. In addition, this method is allowed to be used in both financial accounting and tax accounting.

Discussion

These theoretical aspects of depreciation policy enable to analyze the efficiency of the economic activity of the company operating in the transport industry. The impact of depreciation policy on economic activity can be clearly justified through the analysis of the depreciation strategy in the suburban passenger company Express-Prigorod.

The company has been providing passenger transportation by suburban railway transport for more than 25 years in the territory of the Novosibirsk region. The suburban passenger company Express-Prigorod is the largest suburban carrier beyond the Urals, with more than 22 million transported passengers per year [10].

The purpose of the suburban passenger company Express-Prigorod is to achieve the break-even in suburban railway transportation in the Novosibirsk region. To do this, the company has to keep account of all actual expenses and income from its activities accurately, as well as actively cooperate with the authorities of the region. This can allow Express-Prigorod to meet the needs of the residents of the region in suburban passenger transportation in full, focusing on their real requests and needs.

In addition, Express-Prigorod Company is actively improving the level of transportation services using various financial mechanisms and attracting investments for this purpose. This enables the company to maintain a high level of comfort and safety of passenger transportation, as well as to ensure stable development of railway transport infrastructure in the Novosibirsk region.

Depreciation policy is an important instrument for managing the economic activity of the suburban passenger company Express-Prigorod. It provides effective use of fixed assets, allocation of their acquisition and operation costs. This, in turn, can influence the financial performance of the company.

The amount of accrued depreciation in the suburban passenger company Express-Prigorod for 2020–2022 is shown in Figure 2.

Figure 2 – The amount of accrued depreciation for 2020 – 2022

The total amount of depreciation for three consequent years is 282,573 thousand rubles (2020 – 88,095 thousand rubles; 2021 – 93,286 thousand rubles; 2022 – 101,192 thousand rubles).

Thus, the accrued depreciation in 2022 is 7,906 thousand rubles (+8.4%) higher than in 2021.

According to the investment program approved by the Board of Directors, in 2020 – 2022, fixed assets and intangible assets are purchased for a total amount of 184,186 thousand rubles (2020 – 15,609 thousand rubles; 2021 – 109,057 thousand rubles; 2022 – 59,520 thousand rubles). (See Figure 3)

Figure 3 – Acquired fixed assets and intangible assets

The source of financing of the investment program is depreciation. The total amount of acquired fixed assets and intangible assets for the period 2020 – 2022 amounted to 184,186 thousand rubles.

The income of the suburban passenger company Express-Prigorod earned in the reporting period, but related to the following reporting periods, is reported as the income of future periods in accordance with the procedure prescribed in the accounting regulations (standards). The residual value of the electric train EDM-4M 154, acquired at the expense of targeted financing in 2006, is included in the deferred income. Every year, this indicator is reduced by the amount of depreciation of the electric train. At the same time, there is a decrease in the deferred income and depreciation by the same amount [10].

Without a depreciation policy, an enterprise may face an underestimation of the value of its fixed assets, which can lead to losses and financial problems. Therefore, the correct depreciation policy is a prerequisite for the formation of the company's balance sheet. In case of loss-making, it is possible to use reducing coefficients to the current depreciation rates.

The funds accumulated through depreciation charges are not free. They can only be used purposefully for:

• major repairs of fixed assets;

• to improve assets;

• renewal of funds;

• innovation (extension of the “fleet” of fixed assets).

The company’s fixed assets are worn out by 23% and need to be replaced or repaired. This percentage can indicate the necessity to increase investments in fixed assets in order to maintain the competitiveness of the company.

Conclusions

The suburban passenger company Express-Prigorod uses the straight-line depreciation method, as it is the simplest and most convenient. However, in case of an increase in the percentage of depreciation, the company should consider switching to another depreciation method, such as combined accelerated method of depreciation. This method enables to update fixed assets with a shorter period of useful life than with the use of the straight-line method of depreciation, which is used by the suburban passenger company now.

If Express-Prigorod intends to continue using the straight-line depreciation method, the company should be prepared to increase the percentage of depreciation. Whereas the economy develops and technological progress advances, fixed assets may become obsolete faster than they are depreciated.

Moreover, it should be taken into account that the depreciation policy should be adapted to the changing business conditions. If a company intends to introduce new technologies, it may be necessary to revise and update its depreciation policy.

Thus, the improvement of the depreciation policy is an important step to ensure the efficient use of assets and sustainable development of the company in the long term.

References

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2. Kovalev, V. V. Financial analysis: Capital management. The choice of investments. Analysis of reporting / V. V. Kovalev. – M. : Finance and Statistics, 2011. – 512 p. – ISBN: 5-279-01502-4.

3. Coen, R.M. Investment Behavior, the Measurement of Depreciation and Tax Policy, American Economic Review, 65 (1), March 1975, pp. 59-74.

4. Jorgenson, D.W. Empirical Studies of Depreciation. Economic Inquiry 34, № 1 (1996) 24-42.

5. Antonov, S.V. Management of depreciation policy of the enterprise: monograph / S. V. Antonov. – Yaroslavl: YAF MFUA, 2015. – 164 p. – ISBN 754-8-177-04481-2.Антонов С.В.

6. Kontsypko N.V. Development of conceptual approaches to the depreciation policy as a corporation’s own source of financing. // Herald of Tomsk State University. Economics. 2017. №37. URL: https://cyberleninka.ru/article/n/razvitie-kontseptualnyh-podhodov-k-amortizatsionnoy-politike-kak-sobstvennomu-istochniku-finansirovaniya-korporatsii (accessed: 29.12.2023).

7. Solodov A.K. Depreciation as a tool of social and economic policy of the government // UEkS. 2007. №9. URL: https://cyberleninka.ru/article/n/amortizatsiya-kak-instrument-sotsialno-ekonomicheskoy-politiki-gosudarstva-1 (accessed 29.12.2023).

8. Krupina, N. N. Depreciation policy: formation and analysis / N. N. Krupina. – Moscow: INFRA, 2016. – 301 p. ‒ ISBN 458-5-357-05421-3.

9. Yurkova, T. I. Enterprise Economics / T. I. Yurkova. – Moscow, 2020. – 124 p. – ISBN 347-1-177-84581-1.

10. The official website of «Express-Prigorod» JSC: [website] ‒ URL: https://express-prigorod.ru/passenger/scheme (accessed: 28.12.2023).

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