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CHAPTER 6

Provision for Doubtful Clients

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OVERVIEW

Companies that grant payment terms to their customers are at risk of not receiving the expected settlement at maturity.

To address this possibility, it is recommended – in line with the fundamental principles of accounting – to make provision with the monthly closing, or at least for the closure of annual accounts.

METHODOLOGY

Provisions for doubtful clients are recorded on the balance sheet.

The most common methods for calculating the provision are:

  • Determination of a percentage applicable to the total of client payables,
  • Separation of clients who settle punctually. Those with a significant delay must have an adequate amount of provision.

Whatever the method used, it is recommended not to use rigid criteria for this exercise.

Thus, determining the amount of provision may vary from company to company, depending on the customer portfolio, the industry, the credit situation in general and economic conditions.

For the amount of provision to be calculated properly, the following factors may be useful:

  • An individual analysis of each client balance.
  • The experience of the company in previous calculations.
  • Any guarantees attached to the clients’ payables.
  • Overdue clients should merit special attention; therefore, it is necessary to establish an “aged balance” in order to facilitate analysis and decision making.

ACCOUNTING

The recording of provision is conventional and not different from international methods.

Example:

The company “PROV” has an outstanding 500K R$ of client’s payables. The accounting department of the company assessed that losses on these balances may amount to 4%. Therefore, the accounting department ear-marks a provision of 20K R$.


Recognition of provisions:

INCOME STATEMENT
Charges to provisions /Bad debts: 20,000

ASSETS
Provision for doubtful debts/Declining asset: 20,000


TAX ASPECTS

Since 1st January 1997, the making of provision is no longer tax deductible! Thus, this amount does not reduce the basis for calculating the net taxable income for corporate income tax (IRPJ and CSLL).

On the other hand, since the same date of 1st January 1997, the write-off of uncollected debts is deductible:

  • If there was a judicial liquidation decided by the competent authorities,
  • When there is no warranty, and no limit by client:
    – for debts of up to 5,000 R$, and overdue for over six months, bankruptcy proceedings or not,
    – for debts of up to 30,000 R$ and outstanding for over a year, bankruptcy proceedings or not,
    – for debts of over 30,000 R$ and outstanding for over a year, and provided there are pending procedures for the recovery of sums due.
  • With guarantee, when the deadline has lapsed for over 2 years.

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