Circular No. 64/TC-TCDN guiding the system for establishing and using reserves for inventory write-downs, doubtful debts, and securities write-downs at state-owned enterprises.

CIRCULAR

Guidelines for the establishment and use of provisions for inventory write-downs, doubtful debts, and securities write-downs at state-owned enterprises

Implementing Decree No. 59/CP dated October 3, 1996 of the Government on "Issuing financial management regulations and accounting practices for state-owned enterprises," the Ministry of Finance provides guidelines for the establishment and use of provisions for inventory write-downs, doubtful debts, and securities write-downs in the financial activities of state-owned enterprises as follows:

I. GENERAL PROVISIONS

1. These Circulars apply to state-owned enterprises engaged in production and business operations, including: State-owned corporations, member enterprises of state-owned corporations, other independent-accounting state-owned enterprises that can determine revenue; costs; profits and losses (hereinafter referred to as state-owned enterprises).

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

a. Provision for inventory write-downs: is a provision for the anticipated loss in value due to a decrease in the price of raw materials, finished products, and goods in stock that may occur during the planning year.

b. Provision for securities write-downs in financial activities: is a provision for the anticipated loss in value due to a decrease in the price of various types of securities held by the enterprise that may occur during the planning year.

c. Provision for doubtful debts: is a provision for the anticipated loss in value of receivables that may be uncollectible due to the debtor's inability to pay, which may occur during the planning year.

3. Time of establishment and reversal of provisions: The establishment of provisions for inventory write-downs, doubtful debts, and securities write-downs in financial activities shall be carried out at the time of closing the books to prepare the annual financial statements.

4. The three provisions mentioned above are deducted from the operating expenses of the reporting year to record in advance the value of potential losses that may occur during the planning year, providing the enterprise with financial resources to offset these potential losses, thereby preserving business capital. Enterprises proactively determine the level of establishment and use of each provision according to its purpose and handle them in accordance with the following regulations:

II. ESTABLISHMENT AND USE OF PROVISIONS

1. OBJECTS AND CONDITIONS FOR ESTABLISHING LOSS RESERVES:

a. OBJECTS FOR ESTABLISHING RESERVES:

- Main raw materials used for production, materials, goods, finished products in stock for sale, whose market prices are lower than the recorded prices on accounting books (hereinafter referred to as materials and 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 provisions (inventory write-downs, doubtful debts, investment securities write-downs) shall not exceed the profit generated by the enterprise (after reversing the provisions established in the previous year), and must have the following evidence:

- For materials and goods in stock:

+ Materials and goods in stock at the time of preparing the financial statements with market prices lower than the recorded prices on accounting books.

+ Materials and goods are items of business and under the ownership of the enterprise.

+ There are reasonable and valid invoices or other documents proving the cost of materials and goods in stock.

- For securities that have decreased in value:

+ Securities are those invested by the enterprise in accordance with the provisions of the law.

+ 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:

+ Each receivable must have the name, address, content, and amount owed by each debtor. Among them, the amount of doubtful debts must be clearly stated.

+ To establish a provision for doubtful debts, the enterprise must have original documents or confirmation from the debtor regarding the outstanding debt, including economic contracts, loan agreements, contract settlements, debt commitments, account reconciliations...

The basis for recognizing a bad debt is:

+ Receivables overdue for payment for two years or more, counted from the due date specified in economic contracts, loan agreements, or debt commitments, where the enterprise has made multiple collection attempts but has not recovered the debt.

+ In special cases, even if the overdue period has not reached two years, but the debtor is currently under consideration for dissolution or bankruptcy, or there are other signs such as fleeing, or being detained or prosecuted by legal authorities, then it is also recognized as a doubtful debt.

c. Materials, goods in stock, receivables, and securities that do not meet the conditions stipulated above shall not be subject to provisions.

d. The enterprise must establish a committee to assess the degree of reduction in the value of materials and goods in stock, securities, and identify doubtful receivables.

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 material and goods in stock write-downs:

The enterprise must base the establishment of provisions on the actual situation of price reductions and the actual quantity of materials and goods in stock of each type to determine the level of provisions according to the following formula:

The actual market price of materials, finished products, and goods in stock with reduced prices at the end of December 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 with reduced prices and consolidated into a detailed schedule of provisions for inventory write-downs of the enterprise. The schedule serves as the basis for recording into the enterprise's management costs.

b. Establishing provisions for investment securities write-downs:

The enterprise must establish provisions for each type of investment securities with reduced prices at the end of December of the reporting year, according to the following formula:

The enterprise must establish provisions separately for each type of securities with reduced prices and consolidate them into a detailed schedule of provisions for securities write-downs, serving as the basis for recording into the enterprise's financial activity costs.

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

Based on the objects and conditions for establishing provisions for doubtful debts as stipulated in point 1a and 1b of Section II above, the enterprise must establish provisions for each doubtful receivable, estimate the potential losses that may occur during the planning year, accompanied by documents proving the doubtful receivables.

After establishing provisions for each doubtful receivable, the enterprise consolidates all provisions into a detailed schedule as the basis for recording into the enterprise's management costs.

The maximum level of establishment of provisions for doubtful debts shall not exceed 20% of the total balance of receivables of the enterprise at the end of December each year and ensure that the enterprise does not incur a loss.

3. Handling provisions:

The purpose of establishing reserve items is to compensate for losses due to inventory write-downs, bad debts, and investment securities write-downs. However, according to the current accounting principles, the aforementioned losses have already been reflected in the business results. Therefore, enterprises must reverse all reserve items into the enterprise's income, specifically as follows:

a. For the reserve item for inventory write-downs:

Enterprises must reverse the entire reserve item established at the end of the previous year into extraordinary income to determine the business results. At the same time, they must establish a new reserve for the following year in accordance with the provisions herein.

The reversal of the previously established inventory write-down reserve and the establishment of a new reserve shall be carried out at the time of closing the accounting books to prepare the annual financial report.

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

It shall be treated like the reserve item for inventory write-downs mentioned above, but the value of the reserve item shall be reversed into financial activity income.

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;

- Enterprises must reverse the reserve item for doubtful receivables established in the previous year into extraordinary income to determine the business results. At the same time, they must establish a new reserve for the following year in accordance with the provisions herein.

- The reversal of the previously established doubtful receivables reserve and the establishment of a new reserve shall be carried out at the time of closing the accounting books to prepare the annual financial report.

4. Handling the write-off of uncollectible debts:

a. Uncollectible debts, when being written off, must have one of the following evidences:

- For debtor entities:

+ Decisions of the Court to liquidate the enterprise under the Bankruptcy Law.

+ Decisions of competent authorities regarding the dissolution of the enterprise as stipulated in Decree No. 50/CP dated June 28, 1996 of the Government on the establishment, restructuring, dissolution, and bankruptcy of state-owned enterprises.

+ Other decisions of competent authorities as prescribed by law.

- For individual debtors:

+ The debtor still exists but there is sufficient evidence to prove that they are unable to repay the debt.

+ Warrants for arrest or confirmations from legal authorities regarding debtors who have fled or are serving sentences.

+ The debtor has died and is unable to repay the debt, confirmed by local authorities.

b. Authority to handle:

- The Board of Directors (for State-owned Corporations and enterprises with a Board of Directors); the General Director (for independent enterprises without a Board of Directors) shall base their decision to write off uncollectible receivables on the evidence specified in point 4, Section II, and bear full responsibility for their decision before the State and the law, while implementing measures to address liability according to the current regulations.

- When writing off debts, a record of the Debts Settlement Council must be made, clearly stating the amount of debt recovered, the actual loss (after deducting the amounts recovered), and preparing a detailed list of receivables written off as a basis for accounting.

c. The actual loss of each uncollectible debt is the remaining balance after subtracting the amount recovered (due to compensation by the person causing the loss, proceeds from the sale of the debtor's assets, or distribution of assets according to court decisions or other competent authorities) from the balance recorded in the accounting books.

d. Accounting treatment:

- The actual loss value of uncollectible debts that are allowed to be written off shall be accounted for as management expenses of the enterprise.

- After the decision to write off debts, enterprises must continue to track these receivables separately in their books for a minimum period of five years and continue to take measures to recover the debts. 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 January 1, 1997. All previous regulations on the establishment and use of reserve items that conflict with this Circular are hereby abolished.

2. Financial authorities at all levels are responsible for disseminating, guiding, and supervising state-owned enterprises in establishing and using reserve items for inventory write-downs, doubtful receivables, and investment securities write-downs in accordance with the provisions of this Circular.

In the course of implementation, if there are difficulties or obstacles, state-owned enterprises must promptly reflect them to the Ministry of Finance for research and supplementary guidance.