[puntloos]

I'm not sure I understand your question completely, but as far as I'm aware Kodi does not encode anything. If it detects a format that your amplifier can accept then that will be passed through to the amplifier, Everything else it decodes and then sends uncompressed (LPCM) to the amplifier.

If your amplifier is weird and doesn't support LPCM at all, then I'm afraid you're out of luck.

Actually Kodi does have a Dolby Digital encoder in it. This allows AAC, FLAC etc. multichannel audio files to be played on devices that only support SPDIF bandwith audio and can thus only bitstream DD or DTS and PCM 2.0. Without the Dolby Digital encode/transcode option SPDIF Toslink/Coax amps would only be able to play multichannel FLAC, AAC etc. stuff in PCM 2.0. The option also allows playback of DTS content on systems that don't support DTS and only support Dolby (not many of those around - but there are a few I believe)

I believe it will also allow E-AC3 (aka DD+) 5.1 content to be transcoded to DD 5.1.

(The option appears under DD/AC3 passthrough if you have your audio output configured for 2.0 - unless this option is platform specific?)

This option has renewed popularity for Live TV now too - since passthrough is no longer supported for Live TV, and instead PCM decode is used. If you don't have a 5.1 PCM solution, and only have Toslink / Coax SPDIF, previously you got 5.1 DD bitstreamed if you watched a 5.1 DD TV show. Now you get 5.1 PCM or 2.0 PCM if you have only got SPDIF quality connectivity UNLESS you enable Dolby Transcode, where the 5.1 Dolby Digital is decoded and then recoded back to DD 5.1...

Huh. Interesting. So in what cases will kodi send LPCM and in what cases will it encode to DD?
For what it's worth I strongly prefer kodi not to re-encode everything, since quality loss is inevitable with lossy formats.