Circular No. 228/2009/TT-BTC guiding the system for setting aside and using provisions for inventory write-downs, financial investment losses, doubtful debts, and product warranties at enterprises.

CIRCULAR

Guidelines on the establishment and utilization of provisions for inventory write-downs, financial investment losses, doubtful debts, and product warranties

at enterprises

yêu cầu và bảo hành sản phẩm, hàng hóa, công trình xây lắp tại doanh nghiệp

___________________________________

Pursuant to Decree No. 14/2007/NĐ-CP dated January 19, 2007 of the Government detailing certain provisions of the Securities Law;

Pursuant to Decree No. 118/2008/NĐ-CP dated November 27, 2008 of the Government stipulating the functions, tasks, powers, and organizational structure of the Ministry of Finance;
Pursuant to Decree No. 124/2008/NĐ-CP dated December 11, 2008 of the Government detailing and guiding the implementation of certain provisions of the Law on Corporate Income Tax;
Pursuant to Decree No. 09/2009/NĐ-CP dated February 5, 2009 of the Government promulgating the Financial Management Regulations for State-owned Enterprises and the Management of State Capital Invested in Other Enterprises,

The Ministry of Finance hereby guides the establishment and utilization of provisions for inventory write-downs, financial investment losses, doubtful debts, and product warranties at enterprises as follows:

Part I GENERAL PROVISIONS

Article 1. Applicability:

Organizations engaged in production and business activities subject to income tax under Vietnamese law (hereinafter referred to as enterprises).

1. For enterprises 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 utilization of provisions that differ from the guidelines set forth in this Circular, those provisions shall be followed.

Article 2. Definitions:

1. Inventory write-down provision: This is a provision for the loss in value due to a reduction in the price of raw materials, finished products, and goods in stock.

2. Provision for loss on financial investments: This is a provision for the loss in value due to a decline in the price of securities held by the enterprise; the loss in value of financial investments due to economic entities in which the enterprise has invested suffering losses.

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

4. Provision for product warranties, goods, and construction works: This is a provision for costs associated with repairing or completing products, goods, and construction works sold or delivered to customers, where the enterprise still has the obligation to continue repairs or improvements according to contracts or commitments made with customers.

Article 3. General principles in establishing provisions.

1. The provisions mentioned in Points 1, 2, 3, and 4 of Article 2 of this Circular shall be deducted in advance from the operating expenses of the reporting year of the enterprise, providing the enterprise with financial resources to offset potential losses that may occur during the planning year, thereby preserving business capital; ensuring that the enterprise reflects the value of inventory and 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.

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

For listed enterprises required to prepare interim financial reports, they may establish and reverse provisions at both the interim financial report preparation date.

3. Enterprises must develop mechanisms for managing inventory and receivables to minimize business risks. Regarding receivables and goods, regulations must clearly define the responsibilities of each department and individual in monitoring and managing goods and collecting receivables.

Enterprises are strictly prohibited from exploiting the establishment of provisions to include additional provisions without sufficient basis in operating expenses, thereby reducing their tax obligations. Enterprises that deliberately violate this rule will be penalized as tax evasion under current laws.

4. Enterprises must establish a Board to review the level of establishment of provisions and handle actual losses of inventory, financial investments, and uncollectible receivables in accordance with this Circular and other relevant legal documents. Specifically, the establishment of provisions for product warranty costs shall be carried out in accordance with contracts or commitments with customers.

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

PART II PROVISIONS FOR ESTABLISHING AND USING RESERVE FUNDS

Based on actual price fluctuations of inventory goods, securities prices, values of financial investment assets, difficult-to-collect receivables, and product warranty commitments, enterprises shall independently determine the level of reserve fund establishment and usage for each reserve fund according to its intended purpose and handle them in accordance with the specific regulations set forth below:

Article 4. Reserve for reduction in inventory value.

1. The objects subject to reserve establishment include raw materials, production tools, supplies, merchandise, finished products in inventory (including damaged, substandard quality, outdated fashion, obsolete technology, outdated, stagnant, slow-moving... goods), unfinished products, and unfinished service costs (hereinafter referred to as inventory goods) whose book cost recorded in accounting books exceeds their realizable net value and meet the following conditions:

- There are legal invoices and other supporting documents as prescribed by the Ministry of Finance or other evidence proving the inventory's cost.

- They are materials and goods under the enterprise's ownership held in inventory at the time of preparing the financial statements.

In cases where the realizable net value of raw materials is lower than their book cost but the selling price of products or services produced from these raw materials does not decrease, reserves for reduction in raw material inventory value shall not be established.

2. Method of establishing reserves:

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

The book cost of inventory includes purchase costs, processing costs, and other directly related costs incurred to obtain inventory at its current location and condition as stipulated 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 (expected recovery value) is the estimated selling price of inventory minus (-) the estimated costs to complete the product and estimated marketing costs.

The amount of reserve for reduction in inventory value is calculated separately for each type of reduced-value inventory and consolidated into a detailed schedule. This schedule serves as the basis for recording into the cost of goods sold (total cost of products and goods consumed during the period) of the enterprise.

For unfinished service provision, the reserve for reduction in inventory value is calculated separately for each type of service with distinct pricing.

3. Handling of reserve funds:

At the time of establishing reserves, if the book cost of inventory is higher than the realizable net value of inventory, the enterprise must establish a reserve for reduction in inventory value according to the provisions of Point 1 and Point 2 of this Article.

- If the amount of reserve for reduction in inventory value required to be established equals the balance of the reserve for reduction in inventory value, the enterprise does not need to establish a reserve for reduction in inventory value;

- If the amount of reserve for reduction in inventory value required to be established is higher than the balance of the reserve for reduction in inventory value, the enterprise may record the excess amount into the cost of goods sold during the period;

- If the amount of reserve required to be established is lower than the balance of the reserve for reduction in inventory value, the enterprise must reverse the excess amount and reduce the cost of goods sold.

4. Handling of cancellation for materials and goods that have already had reserves established:

a) Stagnant inventory due to expiration, loss of quality, disease, damage, and lack of usability such as pharmaceuticals, food, medical supplies, livestock, pets, and other goods that must be canceled shall be handled as follows:

The enterprise establishes a Committee to Dispose of Assets to appraise the assets to be canceled. The minutes of the appraisal must detail the name, quantity, value of goods to be canceled, reasons for cancellation, recovered value from liquidation sales, and actual loss value.

The actual loss value of each type of non-recoverable stagnant inventory is the difference between the book value recorded in the accounting books and the recovered value from liquidation (compensation from the person causing the loss, proceeds from liquidation sales).

b) Authority to dispose: Board of Directors (for enterprises with a Board of Directors) or Board of Members (for enterprises with a Board of Members); General Director (or Director) for enterprises without a Board of Directors or Board of Members; the enterprise owner bases on the minutes of the Disposal Committee and relevant evidence regarding stagnant inventory to decide on the cancellation of the aforementioned materials and goods; decides on the responsibility of those involved in the matter and bears responsibility for their decision before the owner and the law.

c) Accounting treatment:

The actual loss value of non-recoverable stagnant inventory that has been decided to cancel, after offsetting with the reserve for reduction in inventory value, the shortfall is recorded into the cost of goods sold of the enterprise.

Article 5.Reserve for loss of financial investments.

1. For securities investments:

a) Objects: are securities meeting the following conditions:

- Securities invested by the enterprise in compliance with legal regulations.

- Freely traded on the market, and at the time of inventory verification and financial statement preparation, the market price is lower than the book value recorded in the accounting books.

Securities that are not allowed to be freely traded on the market, such as restricted transfer securities as prescribed by law; treasury shares shall not establish reserves for reduction in value.

Organizations registered to operate securities business such as securities companies, fund management companies established and operating in accordance with the Securities Law, the establishment of reserves for reduction in value of securities shall be carried out according to separate regulations.

b) Method of establishing reserves:

The level of reserve establishment for reduction in value of securities investments is calculated using the following formula:

- For listed securities: the actual market price of securities is determined based on the average trading price on the day of establishing the reserve on the Hanoi Stock Exchange (HNX) and the closing price on the day of establishing the reserve on the Ho Chi Minh City Stock Exchange (HOSE).

- For unlisted securities on the securities market, the actual market price of securities is determined as follows:

For companies that have registered transactions on the market for unlisted public companies (UPCom), the actual stock price on the market shall be determined as the average trading price on the system on the day the provision is made.

For companies that have not registered transactions on the market for unlisted public companies, the actual stock price on the market shall be determined as the average price based on the transaction prices provided by at least three (03) securities companies at the time of making the provision.

In cases where the market value of the securities cannot be determined, enterprises shall not establish provisions for reduced security values.

For listed securities that have been suspended from trading from the sixth trading day onwards, the book value on the most recent balance sheet date shall be used.

Enterprises must establish separate provisions for each type of investment securities with declining values at the time of preparing financial reports and consolidate them into a detailed schedule of provisions for reduced security values, serving as the basis for accounting entries in the enterprise's financial expenses.

c) Provision handling:

At the time of establishing provisions, if the securities invested in by the enterprise are valued lower than the recorded amount on the accounting books, then provisions must be established according to the regulations stipulated in paragraph b point 1 of this Article;

If the amount of provision required equals the balance of the provision account, the enterprise does not need to establish additional provisions;

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

If the amount of provisions to be established is lower than the balance of the provision account, then the enterprise must reverse the difference and record it as a reduction in financial expenses.

a) Object: These are capital investments by enterprises in other economic organizations established under the law such as state-owned enterprises, limited liability companies, joint-stock companies, partnerships... and other long-term investments that require provisions if the economic organization being invested in incurs losses (except in cases where losses are planned and confirmed in the business plan before the investment).

b) Method of establishing reserves:

The maximum level of provision for each financial investment is equal to the amount of capital invested and calculated using the following formula:

Where:

- The actual capital contributions of all parties to the economic organization are determined based on the Balance Sheet of the economic organization prior to the establishment of the provision (account number 411 and 412 of the Balance Sheet - issued together with Decision No. 15/2006/QĐ-BTC dated March 20, 2006 of the Minister of Finance).

- The actual paid-in equity is determined based on the Balance Sheet of the economic organization prior to the establishment of the provision (account number 410 of the Balance Sheet - issued together with Decision No. 15/2006/QĐ-BTC dated March 20, 2006 of the Minister of Finance).

The basis for establishing provisions when the actual capital contributions of all parties to the economic organization exceed the actual paid-in equity at the reporting period of the economic organization.

Enterprises must establish separate provisions for each financial investment with losses and consolidate them into a detailed schedule of provisions for losses of financial investments. This schedule serves as the basis for accounting entries in the enterprise's financial expenses.

c) Provision handling:

At the time of establishing provisions, if the capital investments in economic organizations suffer losses due to the economic organization incurring losses, then provisions for losses of financial investments must be established according to the regulations stipulated in paragraph b point 2 of this Article;

If the amount of provisions for losses on financial investments to be established equals the balance of the provision account, then the enterprise does not need to establish additional provisions for losses on financial investments;

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

If the amount of provisions to be established is lower than the balance of the provision account, then the enterprise must reverse the difference and record it as a reduction in financial expenses.

Article 6.Provision for difficult-to-collect receivables.

1. Conditions: These are difficult-to-collect receivables that meet the following conditions:

- The receivable must have original documentation, with confirmation from the debtor regarding the outstanding amount, including: economic contracts, loan agreements, contract settlements, debt commitments, accounts receivable reconciliations, and other relevant documents.

Amounts that do not meet the criteria to be classified as receivables under these regulations must be treated as losses.

- There must be sufficient grounds to determine that it is a difficult-to-collect receivable:

+ Receivables overdue for payment as recorded in economic contracts, loan agreements, or other debt commitments.

+ Receivables not yet due for payment but the economic organization (companies, private enterprises, cooperatives, credit institutions...) has entered bankruptcy proceedings or is undergoing liquidation procedures; the debtor is missing, has fled, is under investigation, detention, trial, or execution, or has died.

2. Method of establishing reserves:

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

- For overdue receivables, the level of provision is as follows:

+ 30% of the value for receivables overdue between six months and less than one year.

+ 50% of the value for receivables overdue between one and less than two years.

+ 70% of the value for receivables overdue between two and less than three years.

+ 100% of the value for receivables overdue for three years or more.

- For receivables not yet due for payment but the economic organization has entered bankruptcy proceedings or is undergoing liquidation procedures; the debtor is missing, has fled, is under investigation, detention, trial, or execution, or has died... then the enterprise must estimate the unrecoverable loss amount to establish provisions.

- After establishing provisions for each difficult-to-collect receivable, the enterprise consolidates all provisions for receivables into a detailed schedule to serve as the basis for accounting entries in the enterprise's management expenses.

3. Handling of reserve funds:

- When receivables are determined to be difficult to collect, the enterprise must establish provisions according to the regulations stipulated in point 2 of this Article; if the amount of provision required equals the balance of the difficult-to-collect receivable provision account, the enterprise does not need to establish additional provisions;

- If the amount of provision required exceeds the balance of the difficult-to-collect receivable provision account, the enterprise must add the difference to the management expenses of the enterprise;

- If the amount of provision required is less than the balance of the difficult-to-collect receivable provision account, the enterprise must reverse the difference and reduce the management expenses of the enterprise.

4. Financial treatment of uncollectible debts:

a) Unrecoverable receivables include the following debts:

- For economic organizations:

+ Debts from customers that have been dissolved or declared bankrupt: The court's decision declaring bankruptcy under the Bankruptcy Law or the decision of the competent authority regarding dissolution for the debtor enterprise, in case of self-dissolution, there is a notification from the unit or confirmation from the agency deciding to establish the unit or organization.

+ Debts from customers that have ceased operations and are unable to pay: Confirmation from the agency deciding to establish the enterprise or organization registering business about the cessation of operations and inability to pay of the enterprise or organization.

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

+ Certificate (copy) or confirmation from local authorities regarding debtors who have died but have no inheritable assets to repay the debt.

+ Certificate from local authorities regarding debtors who are still alive or missing but are unable to repay the debt.

+ Warrant or confirmation from legal agencies regarding debtors who have fled or are being prosecuted, serving sentences, or confirmation from local authorities regarding the inability of the debtor or heir to pay.

b) Financial treatment:

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

The actual value of the loss of unrecoverable debts, enterprises use the reserve fund for difficult-to-collect receivables and financial reserve fund (if any) to offset, the shortfall is recorded as management expenses of the enterprise.

After the decision on handling, enterprises must continue to separately track each receivable on the accounting books and reflect it outside the balance sheet for a minimum period of 10 years and a maximum of 15 years from the date of implementation of the handling decision, and continue to take measures to recover the debt. If the debt is recovered, the amount recovered, after deducting related recovery costs, is recorded as other income.

c) When handling unrecoverable receivables, enterprises must prepare the following files:

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

- Detailed list of receivables written off as the basis for accounting, reconciliation statement confirmed by the creditor and debtor, or economic contract settlement statement, or confirmation from the agency establishing the enterprise or organization, or other objective documents proving the outstanding debt and related documents.

- Accounting books, vouchers, and documents proving unrecovered debts, at the time of debt handling, the enterprise records 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); General Director, Director (for enterprises without a Board of Directors or Board of Members) or the enterprise owner bases on the Minutes of the Debt Handling Council and evidence related to debts to decide on handling unrecoverable receivables and bear responsibility for their decisions before the law, while implementing current liability handling procedures.

Article 7. Product warranty reserve.

1. Objectives and conditions for setting up reserves: These are products, goods, construction works implemented and sold or handed over within the year, for which the enterprise commits to provide warranty as stipulated in the contract or other regulations.

2. Method of establishing reserves:

Enterprises estimate the loss amount to be set aside for product, goods, and construction work warranties consumed during the year and establish reserves for each type of product, goods, and construction work with warranty commitments. The total amount of warranty reserves for products, goods, and construction works committed to customers shall not exceed 5% of total sales revenue for products and goods, and not more than 5% of the total value of construction works.

After setting up reserves for each type of product, goods, and construction work, enterprises consolidate the entire reserve amount into a detailed list. The detailed list serves as the basis for accounting:

- For product and goods warranty reserves, when setting aside and recording in selling expenses.

- For construction work warranty reserves, when setting aside and recording in general production costs.

3. Handling of reserve funds:

At the time of setting up reserves, if the actual warranty expenditure exceeds the amount reserved, the shortfall is recorded as selling expenses. If the amount of warranty reserve to be set aside equals the remaining balance of the reserve, the enterprise does not need to set aside additional warranty reserves;

If the amount of warranty reserve to be set aside is higher than the remaining balance of the warranty reserve, the enterprise adds the difference to selling expenses for product and goods warranty reserves or to general production costs for construction work warranty reserves.

If the amount of reserve to be set aside is lower than the remaining balance of the reserve, the enterprise reverses the difference:

- For product and goods warranty reserves, reduce selling expenses.

- For construction work warranty reserves, record as other income.

At the end of the warranty period, if no warranty expenditure is required or the reserved amount is not fully utilized, the remaining balance is reversed according to the above principle.

Part III. IMPLEMENTATION

Article 8.This Circular takes effect 45 days from the date of signature and shall be applied to the establishment of reserve provisions for enterprises starting from 2009, replacing Circular No. 13/2006/TT-BTC dated February 27, 2006 of the Ministry of Finance guiding the system of establishing and using reserve provisions for inventory write-downs, financial investment losses, bad debts, and product warranty expenses at enterprises, and other documents that conflict with the provisions of this Circular regarding the establishment and use of reserve provisions.

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