When are undue receivables considered as bad debts in Vietnam?
When are undue receivables considered as bad debts in Vietnam?
According to point b, clause 1, Article 6 of Circular 48/2019/TT-BTC, the criteria for identifying accounts receivable as bad debts are as follows:
Provision for bad debts
1. The object of provision establishment includes receivables (including loans the enterprise is disbursing and unlisted bonds on the stock market that the enterprise owns) that are overdue and receivables not yet due for payment but the enterprise assesses a risk of not recovering these on time, meeting the following conditions:
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b) Sufficient grounds to determine as bad debts:
- Receivables overdue by 06 months or more (based on the original repayment term according to the economic contract, loan agreement, or other debt commitments, excluding the extension period between parties), the enterprise has sent a debt confirmation or payment reminder but still has not recovered the debt.
- Receivables not yet due for payment but the enterprise has collected evidence proving the debtor’s potential inability to repay on time as stipulated in point c, clause 2 of this Article.
- For debts purchased from a debt-buying enterprise (registered and operating according to the law), the overdue time is calculated from the date of transfer of creditor rights between the parties (based on handover minutes or debt right handover notification) or the latest commitment (if any) between the debtor and the debt-purchasing enterprise.
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c) For receivables not yet due for payment but the enterprise has collected evidence proving that the economic organization has gone bankrupt, has initiated bankruptcy procedures, has fled the business location; the debtor is being prosecuted, detained, tried, or serving sentences by legal authorities, suffering from serious illness (certified by the hospital), or has died; the debt has been requested for enforcement by the enterprise but cannot be executed due to the debtor fleeing the residential place; the debt has been sued but the case is suspended. In such cases, the enterprise should estimate the potential unrecoverable loss (up to the value being tracked in the accounting book) to establish provisions.
Accordingly, receivables not yet due for payment but where the enterprise has collected evidence proving the debtor’s potential inability to repay on time as stipulated in point c, clause 2 of this Article, include:
Receivables not yet due for payment but the enterprise has collected evidence proving the economic organization has gone bankrupt, initiated bankruptcy procedures, or fled the business location;
The debtor is being prosecuted, detained, tried, or serving sentences by legal authorities, suffering from serious illness (certified by the hospital), or has died; or the debt is requested for enforcement by the enterprise but cannot be executed due to the debtor fleeing the residential place;
The debt has been sued but the case is suspended.
Thus, when there is substantial evidence determining that the debtor is unlikely to repay on time according to the outlined cases, the debt is considered as doubtful debt.
When are undue receivables considered as bad debts in Vietnam?
What documents are needed to establish a provision for bad debts in Vietnam?
Under point a, clause 1, Article 6 of Circular 48/2019/TT-BTC, documents required to establish a provision for bad debts include:
- One of the following original documents: Economic contract, loan agreement, debt commitment;
- Contract liquidation document (if any);
- Debt reconciliation; in the absence of debt reconciliation, a request for debt reconciliation confirmation or debt demand letter sent by the enterprise (with postal stamp or confirmation by the delivery unit);
- Debt listing;
- Other relevant documents (if any).
When should an enterprise establish a provision for bad debts when the receivables are identified as bad debts in Vietnam?
According to clause 3, Article 6 of Circular 48/2019/TT-BTC:
Provision for bad debts
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3. If, at the time of year-end financial reporting, receivables are identified as doubtful, the enterprise must establish a provision as stipulated in clause 2 of this Article and other regulations:
a) If the required provision equals the balance of the doubtful debt provision established in the previous year’s report recorded in the accounting book, the enterprise cannot establish an extra provision for doubtful debt.
b) If the required provision exceeds the balance of the doubtful debt provision established in the previous year’s report recorded in the accounting book, the enterprise should establish an additional provision for the excess and record it as an expense in the period.
c) If the required provision is less than the balance of the doubtful debt provision established in the previous year’s report recorded in the accounting book, the enterprise should reverse the difference and reduce the period's expenses.
d) The enterprise should estimate the potential loss or overdue aging of debts to establish a provision for each doubtful debt, along with evidence proving the bad debts above. Following individual provisions for each doubtful receivable, the enterprise should compile all provisions into a detailed list as a basis for accounting the enterprise's expenses.
dd) For debts purchased from a debt-buying enterprise, the provision should be established according to the purchasing plan, debt handling plan, and the principles of provision establishment in this Circular. The maximum provision is the amount paid for the debt purchase; its establishment period should not exceed the restructuring or debt recovery period in the purchasing and handling plan.
e) The enterprise cannot establish a provision for overdue receivables arising from dividends or profits distributed from investments in other enterprises.
g) When establishing a provision for bad debts of a debtor with both receivables and payables, based on the debt reconciliation minutes between the parties, the enterprise should establish a provision on the remaining receivables after offsetting the payables of the debtor.
The provision rate for each overdue debt is calculated as a percentage (%) of the overdue debt as required by the regulation, multiplied (x) by the total remaining receivables after offsetting the payables.
Thus, at the time of year-end financial reporting, if receivables are identified as doubtful, the enterprise must establish a provision as stipulated.
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