Circular No. 107/2001/TT-BTC guides the establishment and use of provisions for inventory write-downs, investment securities write-downs, and doubtful debts at enterprises.

CIRCULAR

OF THE MINISTRY OF FINANCE NUMBER 107/2001/TT-BTC DATE DECEMBER 31, 2001
REGARDING GUIDELINES ON THE SYSTEM OF ESTABLISHING AND USING RESERVES FOR REDUCED PRICES OF INVENTORY GOODS, SECURITIES, AND BAD DEBTS AT ENTERPRISES
REGARDING THE ESTABLISHMENT AND USE OF RESERVES FOR REDUCED PRICES OF INVENTORY GOODS, SECURITIES, AND BAD DEBTS AT ENTERPRISES

TO CREATE A FAIR BUSINESS ENVIRONMENT BETWEEN ENTERPRISES OF ALL ECONOMIC SECTORS IN LINE WITH THE LAWS ON STATE OWNED ENTERPRISES, THE LAW ON ENTERPRISES, AND THE LAW ON FOREIGN INVESTMENT IN VIETNAM, THE MINISTRY OF FINANCE GUIDES THE ESTABLISHMENT AND USE OF RESERVES FOR REDUCED PRICES OF INVENTORY GOODS, SECURITIES, AND BAD DEBTS AT ENTERPRISES AS FOLLOWS:

I. GENERAL PROVISIONS

1. Scope of application:

- State-owned enterprises;

- Enterprises operating under the Law on Enterprises;

- Joint ventures, wholly foreign-owned enterprises, and foreign parties participating in business cooperation based on contracts (referred to as foreign joint venture parties) operating under the Law on Foreign Investment in Vietnam;

For joint ventures established based on agreements signed between the Government of the Socialist Republic of Vietnam and the Government of foreign countries, if the agreement contains provisions regarding the establishment and use of reserves that differ from the guidelines set forth in this Circular, such provisions shall be implemented according to the agreement.

2. In this Circular, the following terms are understood as follows:

a. Reserve for reduced prices of inventory goods: This reserve covers the loss in value due to price reductions of raw materials, finished products, and goods in inventory that may occur within the planning year.

b. Reserve for reduced prices of securities in financial activities: This reserve covers the loss in value due to price reductions of various types of securities held by the enterprise that may occur within the planning year.

c. Reserve for bad debts: This reserve covers the loss in value of receivables that may not be recoverable due to the debtor's inability to pay within the planning year.

3. TIME FOR ESTABLISHING AND REVERSING RESERVES: The establishment and reversal of reserves for reduced prices of inventory goods, reserves for bad debts, and reserves for reduced prices of securities in financial activities are all carried out at the time of closing the accounting books to prepare the annual financial statements.

In cases where the Ministry of Finance approves the application of a fiscal year different from the calendar year (beginning on January 1 and ending on December 31 each year), the time for establishing reserves will be the last day of the fiscal year.

4. THE THREE TYPES OF RESERVES MENTIONED ABOVE ARE DRAWN IN ADVANCE FROM THE OPERATING COSTS OF THE REPORTING YEAR OF THE ENTERPRISE, PROVIDING THE ENTERPRISE WITH FUNDS TO COMPENSATE FOR POSSIBLE LOSSES THAT MAY OCCUR DURING THE PLANNING YEAR, AIMING TO PRESERVE BUSINESS CAPITAL; ENSURING THAT THE ENTERPRISE REFLECTS THE VALUE OF INVENTORY GOODS, SECURITIES, AND RECEIVABLES NO HIGHER THAN MARKET PRICES OR RECOVERABLE VALUES AT THE TIME OF PREPARING THE FINANCIAL STATEMENTS.

5. BASED ON ACTUAL CHANGES IN PRICES OF INVENTORY GOODS, SECURITIES, AND BAD DEBTS, THE ENTERPRISE SHALL AUTONOMOUSLY DETERMINE THE LEVEL OF ESTABLISHING AND USING EACH TYPE OF RESERVE IN ACCORDANCE WITH ITS PURPOSE AND HANDLE ACCORDING TO THE SPECIFIC PROVISIONS BELOW:

II. ESTABLISHMENT AND USE OF PROVISIONS

1. OBJECTS AND CONDITIONS FOR ESTABLISHING LOSS RESERVES:

a. OBJECTS FOR ESTABLISHING RESERVES:

- Raw materials, tools for production, inventory goods, finished products, whose market prices are lower than the recorded prices on the accounting books (hereinafter referred to as inventory goods).

- Securities held by the enterprise that have decreased in value compared to the recorded prices on the accounting books.

- Bad debts.

b. CONDITIONS FOR ESTABLISHING RESERVES:

The establishment of reserves (for reduced prices of inventory goods, bad debts, and reduced prices of securities) must meet the following conditions:

- For inventory goods:

+ Legal invoices and other documents as prescribed by the Ministry of Finance or other evidence proving the cost of inventory goods.

+ These are inventory goods owned by the enterprise at the time of preparing the financial statements with recovery values or market prices lower than the recorded prices on the accounting books.

Inventory goods that have decreased in value compared to the recorded prices on the accounting books include: inventory goods that are damaged, deteriorated, obsolete, or have experienced a general decrease in market selling prices.

If inventory goods have decreased in value compared to the recorded prices on the accounting books but the selling price of products or services produced from these goods has not decreased, then a reserve for reduced prices of inventory goods cannot be established.

- For securities that have decreased in value:

+ These are securities held by the enterprise in accordance with the laws.

+ They can be freely traded on the market and at the time of inventory taking and preparing the financial statements, their market prices are lower than the recorded prices on the accounting books.

Securities that cannot be freely traded on the market shall not establish a provision for impairment.

- For bad debts:

+ There must be the name, address, content, amount owed by each debtor, clearly stating the amount of bad debt.

+ To establish a reserve for bad debts, the enterprise must have original documents or confirmation from the debtor regarding the outstanding amount, including economic contracts, loan agreements, contract settlements, debt commitments, accounts reconciliation...

The basis for recognizing a bad debt is:

+ Receivables overdue for payment for two years or more since the due date specified in economic contracts, loan agreements, or debt commitments, where the enterprise has made multiple collection attempts without success.

+ In special cases, even though the overdue period has not reached two years, if the debtor is in the process of being dissolved, bankrupted, or shows signs such as fleeing, being prosecuted, detained, or tried by legal authorities, it can also be recognized as a bad debt.

c. Types of inventory goods, bad debts, and securities that do not meet the above conditions shall not establish reserves.

d. The enterprise must establish a committee to assess the degree of reduction in the value of inventory goods, securities, and determine bad debts. claim.

The committee is established by the General Director, consisting of mandatory members: the General Director, the Chief Accountant, and the Head of the Materials Department or Sales Department.

2. METHODS FOR ESTABLISHING RESERVES:

a. Establishing provisions for inventory materials and goods write-downs:

The enterprise must base on the reduction situation, the actual quantity of each type of inventory materials and goods to determine the level of provision according to the following formula:

The actual market price of various types of inventory materials, finished products, and goods subject to write-down at the time of preparing the financial report for the year is the price that can be purchased or sold on the market.

The establishment of provisions must be conducted separately for each type of material and goods subject to write-down and consolidated into a detailed schedule of inventory materials and goods write-down provisions. This schedule serves as the basis for recording into the management expenses of the enterprise.

b. Establishing provisions for investment securities write-downs:

The enterprise must establish provisions separately for each type of investment securities experiencing a price decline at the time of preparing the financial report for the reporting year, according to the following formula:

The enterprise must establish provisions separately for each type of securities subject to write-down and consolidate them into a detailed schedule of investment securities write-down provisions, serving as the basis for recording into the financial activity expenses of the enterprise.

c. Establishing provisions for difficult-to-collect receivables:

Based on the objects and conditions for establishing provisions for difficult-to-collect receivables as stipulated in point a and point b, clause 1, section II above, the enterprise must estimate the potential losses that may occur in the planning year for each receivable and proceed to establish provisions for each difficult-to-collect receivable, accompanied by evidence proving such difficult-to-collect receivables.

After establishing provisions for each difficult-to-collect receivable, the enterprise consolidates all provisions for receivables into a detailed schedule as the basis for recording into the management expenses of the enterprise.

The total amount of provisions for difficult-to-collect receivables shall not exceed 20% of the total balance of receivables of the enterprise at the time of preparing the financial report for the year.

3. Handling provisions:

Inventory materials and goods, investment securities, and difficult-to-collect receivables that have been established with provisions, if in reality, inventory materials and goods are not subject to write-down, have been used for production and business operations or have been sold; debts have been recovered, then the write-down provisions for inventory materials and goods, investment securities, or difficult-to-collect receivables must be restored to the enterprise's current income. Specifically as follows: a. For write-down provisions for inventory materials and goods:

At the end of the year, if the enterprise has inventory materials and goods subject to write-down compared to the book value recorded in the accounting books, it must establish write-down provisions for inventory materials and goods according to the regulations above;

If the amount of write-down provisions required to be established for the planning year equals the balance of the previous year's write-down provisions, the enterprise does not need to establish write-down provisions for inventory materials and goods into management expenses;

If the amount of write-down provisions required to be established exceeds the balance of the previous year's write-down provisions for inventory materials and goods,

the enterprise must record additional management expenses equal to the difference between the amount required to be established for the planning year and the balance of the previous year's write-down provisions. Conversely, if the amount of write-down provisions required to be established for the planning year is lower than the balance of the previous year's write-down provisions for inventory materials and goods, the enterprise must restore other income equal to the difference between the balance of the previous year's write-down provisions and the amount required to be established for the planning year. The timing of restoring write-down provisions for inventory materials and goods already established and establishing new provisions is carried out at the time of closing the accounting books to prepare the annual financial report.

b. For investment securities write-down provisions:

To be handled like the write-down provisions for inventory materials and goods mentioned above, but the value of the restored provisions is recorded into financial activity income.

c. For difficult-to-collect receivables write-down provisions:

- When difficult-to-collect receivables are identified, the enterprise must establish provisions according to the regulations above; if the amount of provisions required to be established for the planning year equals the balance of the previous year's difficult-to-collect receivables provisions, the enterprise does not need to establish;

If the amount of provisions required to be established exceeds the balance of the previous year's difficult-to-collect receivables provisions, the enterprise must record additional management expenses equal to the difference between the amount required to be established for the planning year and the balance of the previous year's difficult-to-collect receivables provisions;

Conversely, if the amount of provisions required to be established for the planning year is lower than the balance of the previous year's difficult-to-collect receivables provisions, the enterprise must restore other income equal to the difference between the balance of the previous year's difficult-to-collect receivables provisions and the amount required to be established for the planning year.

- The timing of restoring difficult-to-collect receivables provisions already established and establishing new provisions is carried out at the time of closing the accounting books to prepare the annual financial report.

4. Handling write-off of unrecoverable debts:

a. Unrecoverable debt, when writing off, must have:

- Minutes of the Enterprise Debt Settlement Council. In which, the value of each receivable, the value of recovered debt, and the actual loss value (after deducting recovered amounts) are clearly stated.

- A detailed schedule of receivables written off as the basis for recording.

- Court decision for bankruptcy settlement of the enterprise under the Bankruptcy Law or decision of the competent authority regarding dissolution of the debtor unit.

- Confirmation letter from local authorities regarding deceased debtors who have no inheritable assets to repay the debt.

- Confirmation letter from local authorities regarding living debtors who have no ability to repay the debt.

- Warrant or confirmation from law enforcement agencies regarding debtors who have fled or are being prosecuted, serving sentences but beyond the two-year period since the debt was incurred.

- Decision of the competent authority regarding the write-off of unrecoverable debts of the enterprise.

b. Authority to handle debts:

- Decision of the competent authority regarding the handling of uncollectible debt write-off by the enterprise.

b. Authority to handle debts:

- The Board of Directors (for enterprises with a Board of Directors) or the Members' Council (for enterprises with a Members' Council); the General Director, Director (for enterprises without a Board of Directors) or the enterprise owner shall base their decision to write off unrecoverable receivables on relevant evidence related to debts, and bear full responsibility for such decisions before the State and the law, while implementing current measures to address liability.

c. The actual loss level of each unrecoverable debt is the remainder after deducting the amount of recovered debt (from compensation by the person causing damage, from the sale of the debtor's assets, or from distribution of assets according to court decisions or other competent authorities) from the receivable balance recorded in the accounting books.

d. Accounting treatment:

- The actual loss value of unrecoverable debt that is allowed to be written off shall be accounted for as management expenses of the enterprise.

- After the decision to write off receivables has been made, the enterprise must continue to separately track them in its records for a minimum period of five years and continue to take measures to recover the debt. If the debt is recovered, the amount recovered, after deducting related recovery costs, shall be accounted for as extraordinary income.

III. IMPLEMENTATION PROVISIONS:

1. This Circular takes effect from the date of issuance, replacing Circular No. 64 TC/TCDN dated September 15, 1997 of the Ministry of Finance, guiding the regime for establishing and using reserves for inventory write-downs, doubtful accounts reserve, and securities write-downs at state-owned enterprises and other documents that stipulate the establishment and use of reserves contrary to this Circular.

2. Credit institutions shall implement the establishment of reserves in accordance with the financial management regulations applicable to credit institutions.

3. Enterprises must establish mechanisms for managing materials, goods, and accounts receivable to minimize business risks. For accounts receivable, regulations must clearly define the responsibilities of each department and individual in managing, tracking, and recovering accounts receivable to minimize uncollectible accounts as much as possible, as well as to determine the material responsibility of each department and individual when uncollectible accounts arise. It is strictly prohibited for enterprises to exploit the establishment of reserves to add non-substantiated reserve amounts to expenses in order to reduce tax obligations. Enterprises deliberately violating this will be penalized as if they were evading taxes.

4. Financial agencies at all levels are responsible for disseminating, guiding, and inspecting enterprises in establishing and using reserves for material and goods inventory write-downs, difficult-to-collect receivables, and securities write-downs in accordance with the provisions of this Circular.

5. In the course of implementation, if there are any difficulties, they should be promptly reported to the Ministry of Finance for study and amendment.