Circular No. 13/2006/TT-BTC guiding the system for setting aside and using provisions for inventory write-downs, financial investment losses, bad debts, and product warranties, goods, and construction works at enterprises.

CIRCULAR

Guidelines for the establishment and use of provisions for inventory write-downs, financial investment losses, bad debts, and product warranties at enterprises

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In order to create a fair business environment for Vietnamese enterprises, the Ministry of Finance provides guidelines for the establishment and use of provisions for inventory write-downs, financial investment losses, bad debts, and product warranties at enterprises as follows:

I. GENERAL PROVISIONS

1. Scope of application:

Enterprises established in accordance with Vietnamese law (including those with foreign investment capital).

For joint ventures established based on agreements signed between the Government of the Socialist Republic of Vietnam and foreign governments, if such agreements contain provisions regarding the establishment and use of different provisions from those set out in this Circular, they shall be implemented according to the provisions of those agreements.

2. Enterprises are allowed to establish the following provisions:

a) Provision for inventory write-downs: This is a provision for the loss in value due to a decrease in the price of raw materials, finished products, and goods in inventory.

b) Provision for financial investment losses: This is a provision for the loss in value due to a decrease in the price of securities held by the enterprise; the loss in value of financial investments due to the economic organization being invested in suffering losses.

c) Provision for doubtful receivables: This is a provision for the loss in value of overdue receivables, receivables not yet overdue but which may not be recoverable due to the debtor's inability to pay.

d) Provision for product warranties, goods, and construction projects: This is a provision for costs associated with products, goods, and construction projects that have been sold or delivered to customers but for which the enterprise still has a contractual obligation to repair or complete.

3. The four provisions mentioned in Clause 2 above are deducted in advance from the operating expenses of the enterprise's annual report, providing the enterprise with financial resources to offset potential losses in the planning year, thereby preserving business capital; ensuring that the enterprise reflects the value of inventory materials and goods, financial investments not higher than market prices, and the value of receivables not higher than the amount that can be recovered at the time of preparing the financial statements.

4. The timing for establishing and reversing provisions is the end of the accounting period year. In cases where enterprises are approved by the Ministry of Finance to apply a fiscal year other than the calendar year (beginning on January 1 and ending on December 31 each year), the timing for establishing provisions is the last day of the fiscal year.

Specifically, listed enterprises required to prepare interim financial reports must establish and reverse provisions at the time of preparing the interim financial report.

5. Enterprises must establish a Board to review the level of establishment of provisions and the actual handling of losses of inventory materials, financial investments, and uncollectible receivables in accordance with this Circular and relevant laws. As for the establishment of provisions for product warranty costs, it should be carried out according to contracts or commitments with customers.

The Board consists of: General Director, Chief Accountant, heads of related departments, and some experts if necessary. The General Director of the enterprise decides to establish the Board.

II. ESTABLISHMENT AND USE OF PROVISIONS

Based on actual fluctuations in inventory prices, security prices, values of financial investments, doubtful receivables, and product warranty commitments, enterprises proactively determine the level of establishment and use of each provision for specific purposes and handle them according to the specific regulations below:

1. Provision for inventory write-downs:

1.1. The objects for establishing provisions include raw materials, production tools, inventory materials, goods, finished products in stock (including damaged, deteriorated quality, outdated fashion, outdated technology, obsolete, stagnant, slow-moving inventory), unfinished products, and unfinished service costs (hereinafter referred to as inventory) whose book value recorded in the accounting books is higher than the realizable net value and meet the following conditions:

- Having legal invoices and documents as stipulated by the Ministry of Finance or other evidence proving the cost of inventory.

- Being materials and goods under the ownership of the enterprise in stock at the time of preparing the financial statements.

If the realizable net value of raw materials is lower than their book value but the selling price of products or services produced from these raw materials does not decrease, then the provision for inventory write-downs of these raw materials cannot be established.

1.2. Method of establishing provisions:

The level of establishment of provisions is calculated using the following formula:

The book value of inventory materials includes: purchase costs, processing costs, and other directly related costs as specified in Accounting Standard No. 02 - Inventory issued together with Decision No. 149/2001/QĐ-BTC dated December 31, 2001 of the Minister of Finance.

The realizable net value of inventory materials (expected recovery value) is the estimated selling price of inventory materials minus the estimated costs to complete the product and estimated marketing costs.

The level of establishment of inventory write-down provisions is calculated for each type of inventory material experiencing a write-down and consolidated into a detailed schedule. This schedule serves as the basis for recording in the cost of goods sold (total cost of products and goods consumed during the period) of the enterprise.

Specifically, for unfinished service provision, the establishment of inventory write-down provisions is calculated separately for each type of service with its own specific price.

1.3. Handling of provisions:

At the time of establishing provisions, if the book value of inventory materials is higher than the realizable net value of inventory materials, then provisions for inventory write-downs must be established according to the provisions set out in Points 1.1 and 1.2 above.

- If the amount of the provision for impairment to be established equals the balance of the inventory impairment provision account, the enterprise shall not establish an additional inventory impairment provision account;

- If the amount of the provision for impairment to be established exceeds the balance of the inventory impairment provision account, the enterprise shall add the difference to the cost of goods sold;

- If the amount of the provision to be established is less than the balance of the inventory impairment provision account, the enterprise shall reverse the difference into other income;

1.4. Handling write-off for materials and goods that have had provisions established:

a) Inventory that has expired, deteriorated, been affected by disease, damaged and rendered unusable, such as pharmaceuticals, food, medical supplies, livestock, pets, and other materials and goods that must be destroyed shall be handled as follows:

Establish a committee to assess the assets of the enterprise to appraise the assets to be destroyed. The minutes of the appraisal must detail the name, quantity, value of the goods to be destroyed, the reasons for destruction, the value recovered from liquidation sales, and the actual loss value.

The actual loss of each type of unrecoverable inventory is the difference between the book value recorded on the accounting books minus the value recovered from liquidation (compensated by the person responsible for the loss or from the sale of the goods).

b) Authority to handle: The Board of Directors (for enterprises with a Board of Directors) or the Board of Members (for enterprises with a Board of Members); the General Director, Director (for enterprises without a Board of Directors); the enterprise owner shall base their decision to destroy the materials and goods mentioned above on the minutes of the committee and evidence related to the inventory, and decide on the responsibility of those involved in the matter and bear responsibility for their decision before the owner and the law.

c) Accounting treatment:

The actual loss value of unrecoverable inventory that has been decided to be destroyed, after being offset by the inventory impairment provision account, the shortfall is recorded in the cost of goods sold of the enterprise.

2. Provision for losses on financial investments:

2.1. Object: Financial securities and capital invested by the enterprise in other economic organizations meeting the following conditions:

a) For investment securities:

- These are types of securities such as stocks, corporate bonds... that the enterprise invests in accordance with the provisions of the law.

- They can be freely traded on the market, and at the time of inventory taking and financial statement preparation, the market price is lower than the book value recorded on the accounting books.

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

Special cases for securities companies solely engaged in securities trading are not subject to the regulations on establishing provisions for losses on investment securities as stipulated in this Circular.

b) For long-term investments of the enterprise in economic organizations that are subsidiaries, limited liability companies with one member, limited liability companies with two or more members, joint-stock companies, partnerships, joint ventures, and other long-term investments, a provision must be established if the economic organization being invested in incurs a loss (except for losses planned in the business plan before the investment).

2.2. Method of establishing provisions:

a) Types of investment securities:

The level of establishment of provisions is calculated using the following formula:

The enterprise must establish a separate provision for each type of investment security experiencing a decline in value at the time of financial statement preparation and consolidate it into a detailed schedule of investment security impairment provisions, serving as the basis for recording in the financial expenses of the enterprise.

b) Long-term financial investments:

Maximum amount to be set aside for each long-term financial investment calculated as follows:

- The actual paid-in capital is determined based on the Balance Sheet of the economic organization prior to the establishment of the provision (account code 410 of the Balance Sheet - issued together with Circular No. 23/2005/TT-BTC dated March 30, 2005 of the Ministry of Finance).

The basis for establishing provisions when the actual capital contribution of all parties in the economic organization exceeds the actual paid-in capital at the time of the financial statement.

The enterprise must establish a separate provision for each investment with losses and consolidate them into a detailed schedule of investment loss provisions. The schedule serves as the basis for recording in the financial expenses of the enterprise.

2.3. Handling of provisions:

At the time of establishing provisions, if the securities invested by the enterprise have decreased in value compared to the book value on the accounting books, and the capital invested in economic organizations has suffered losses due to the economic organizations incurring losses, then provisions for losses on financial investments must be established according to the provisions stated in point 2.2 above;

If the amount of the provision for losses on financial investments to be established equals the balance of the provision account, the enterprise shall not establish an additional provision for losses on financial investments;

If the amount of the provision to be established is higher than the balance of the provision account, the enterprise shall add the difference to the financial expenses of the enterprise;

If the amount of the provision to be established is lower than the balance of the provision account, the enterprise shall reverse the difference into financial activity revenue.

3. Provision for doubtful debts:

3.1. Object and conditions: Debts receivable that meet the following conditions:

3.1. Subject and conditions: are receivables that meet the following conditions:

- The debt must be supported by original documents, confirmed by the debtor regarding the outstanding amount, including economic contracts, loan agreements, contract settlements, debt commitments, account reconciliations, and other relevant documents.

Debts that lack sufficient grounds to be classified as receivables under this provision shall be treated as losses.

- There are sufficient grounds to determine that the receivable is a difficult-to-collect debt:

+ Receivables overdue according to economic contracts, loan agreements, or other debt commitments.

+ Receivables not yet due for payment but the economic organization (companies, private enterprises, cooperatives, credit institutions, etc.) has entered bankruptcy proceedings or is undergoing dissolution procedures; the debtor is missing, has fled, is being prosecuted, detained, tried, serving a sentence, or has died.

Overdue debts exceeding three years are considered unrecoverable and shall be handled according to the provisions set forth in Point 3.4 below.

3.2. Provision Method:

Enterprises must estimate potential losses or the age of overdue receivables and establish provisions for each difficult-to-collect receivable, accompanied by evidence proving such difficult-to-collect receivables. Specifically:

- For overdue receivables, the provision rates are as follows:

+ 30% of the value for receivables overdue from three months to less than one year.

+ 50% of the value for receivables overdue from one year to less than two years.

+ 70% of the value for receivables overdue from two years to less than three years.

- For receivables not yet due for payment but where the economic organization has entered bankruptcy proceedings or is undergoing dissolution procedures; the debtor is missing, has fled, is being prosecuted, detained, tried, or serving a sentence... the enterprise must estimate the unrecoverable loss and establish provisions accordingly.

- After establishing provisions for each difficult-to-collect receivable, the enterprise must compile a detailed list of all provisions for receivables to serve as the basis for recording them in the management expenses of the enterprise.

3.3. Handling Provisions:

- When receivables are determined to be difficult to collect, the enterprise must establish provisions according to the provisions set forth in Point 3.2 above; if the amount of provision required equals the balance of the provision for difficult-to-collect receivables, the enterprise does not need to establish additional provisions;

- If the amount of provision required exceeds the balance of the provision for difficult-to-collect receivables, the enterprise must record the difference as additional management expenses;

- If the amount of provision required is less than the balance of the provision for difficult-to-collect receivables, the enterprise must reverse the difference into other income.

3.4. Financial Handling of Unrecoverable Debts:

a) Unrecoverable receivables include the following debts:

- For economic organizations:

+ Debtor has been dissolved or declared bankrupt: court decision declaring bankruptcy of the enterprise under the Bankruptcy Law or decision of the competent authority on dissolution of the indebted enterprise, in case of self-dissolution, there is a notification from the unit or confirmation from the authority deciding to establish the unit, organization.

+ Debtor has ceased operations and is unable to pay: confirmation from the authority deciding to establish the enterprise or organization registering business about the enterprise or organization ceasing operations and being unable to pay.

- For individuals, one of the following documents must be provided:

+ Death certificate (copy) or confirmation from local authorities regarding the debtor who has died but has no inheritable assets to repay the debt.

+ Confirmation from local authorities regarding the debtor who is still alive or missing but unable to repay the debt.

+ Warrant for arrest or confirmation from law enforcement agencies regarding the debtor who has fled or is being prosecuted, serving a sentence, or confirmation from local authorities regarding the debtor or heir's inability to pay.

- Decision of the competent authority on handling uncollectible debt write-off of the enterprise (if any).

For receivables overdue for more than three years without sufficient supporting documents and evidence as stipulated, the enterprise must establish a Debt Settlement Committee to examine and handle according to the provisions of this clause.

b) Financial Handling:

The actual loss of each uncollectible receivable is the difference between the receivable recorded in the accounting books and the amount recovered (from compensation by the person causing the loss, from selling off the debtor's assets, from distribution of assets according to court decisions or other competent authorities).

The actual loss value of uncollectible receivables, the enterprise uses the reserve for difficult-to-collect receivables, financial reserve fund (if any) to offset, the shortfall is recorded in the management expenses of the enterprise.

After the decision to handle receivables, the enterprise must separately track them on the accounting books and external balance sheet for a minimum of five years and continue to take measures to recover the debt. If the debt is recovered, the enterprise records the recovered amount, after deducting related recovery costs, into other income.

c) When handling uncollectible receivables, the enterprise must prepare the following documentation:

- Minutes of the Debt Settlement Committee of the enterprise. It clearly states the value of each receivable, the recovered amount, and the actual loss (after deducting recovered amounts).

- Detailed list of receivables written off for accounting purposes, reconciliation statements confirmed by creditors and debtors, or economic contract settlements, or confirmations from the authority deciding to establish the enterprise, organization, or other objective documents proving the outstanding debt and related documents.

- Accounting books, documents, and evidence proving uncollected receivables, at the time of debt handling, the enterprise is still recording receivables on its accounting books.

d) Authority to Handle Debts:

The Board of Directors (for enterprises with a Board of Directors) or the Board of Members (for enterprises with a Board of Members); the General Director, Director (for enterprises without a Board of Directors or a Board of Members) or the enterprise owner shall base their decision on the Minutes of the Handling Committee, evidence related to debts, to decide on handling unrecoverable receivables and bear legal responsibility for their decisions, while implementing measures to address liability according to current regulations.

4. Reserve for warranty of products, goods, construction works:

4.1. Object and conditions for establishing reserves: These are products, goods, construction works implemented and sold or handed over during the year, for which the enterprise commits to provide warranty under the contract or other relevant documents.

4.2. Method of establishing reserves:

The enterprise estimates the loss amount to be reserved for warranty of consumed products, goods, construction works within the year and establishes reserves for each type of product, good, construction work with warranty commitments. The total amount of warranty reserve established for products, goods, construction works according to the commitments made to customers shall not exceed 5% of the total revenue from sales of these products, goods.

After establishing reserves for each type of product, good, construction work, the enterprise consolidates all reserve amounts into a detailed schedule. The detailed schedule serves as the basis for recording in selling expenses.

4.3. Handling of reserve amounts:

At the time of establishing reserves, if the actual expenditure for warranty exceeds the amount already reserved, the difference is recorded in selling expenses. If the amount of warranty reserve to be established equals the balance of the reserve account, the enterprise does not need to establish a warranty reserve;

If the amount of warranty reserve to be established is higher than the balance of the warranty reserve account, the enterprise records the difference in selling expenses.

If the amount of reserve to be established is lower than the balance of the reserve account, the enterprise reverses the difference into other income.

Upon expiration of the warranty period, if there is no warranty expense incurred or the reserved amount is not fully utilized, the remaining balance is reversed into other income.

III. IMPLEMENTATION

1. This Circular takes effect fifteen days after its publication in the Official Gazette, replacing Circular No. 107/2001/TT-BTC dated December 31, 2001 of the Ministry of Finance guiding the system of establishing and using reserves for inventory write-downs, investment securities write-downs, and doubtful debt reserves at 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 and goods, regulations must clearly define the responsibilities of each department and individual in monitoring and managing goods, and collecting accounts receivable.

Enterprises are strictly prohibited from taking advantage of the establishment of reserves to include additional reserve amounts without sufficient grounds in expenses, thereby reducing tax obligations. Enterprises deliberately violating this provision will be penalized as tax evasion under current laws.

4. In the course of implementation, if any difficulties arise, they should be promptly reported to the Ministry of Finance for study and amendment./.