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Hello Sir,
is there specific standard, that says how to calculate allowance for receivables and how to write off irrecoverable debt?
I did study how to calculate, and what entries should be, but I don’t remember what is the theory base (or standard) for doing that.
Thank you in advanceHi Sangria
No, there’s no standard. You will have covered this in kindergarten, primary school, secondary school, university or F3 if none of the other 4 was applicable and you didn’t have an exemption.
I suggest that you bite the virtual bullet and listen to John Moffat’s lectures on the topic on the F3 section of this site. It may take you 30 minutes or so but you should find that you’re remembering the basics pretty quickly
I’m trying to understand why should the company make such provisions.
It is covered in our national accounting standards (separate standard!) that company should make provisions for doubtful debt, and this standard even gives some methods of calculating such amounts.And what about IFRS? Why companies do that? IAS 37 Provisions, contingent liabilities… doesn’t cover these provisions.
Or just Framework (faithful representation)?Hi Sangria
There is a general principle that current assets should be shown at the lower of cost and net realisable value (unlike tangible non-current assets to be shown at historic cost less accumulated depreciation and less impairments (cost model) or valuation (valuation model))
IAS 37 talks about provisions needing to be made where a liability probably exists and is reliably measurable. Surely a provision for doubtful debts is recognition of a probable decrease in an asset – the equivalent of the probable future occurrence of a liability
Faithful representation comes into it as also does substance over form. In addition, one of the fundamental principles underlying the preparation of any set of financial statements is prudence. When I was a student, we were taught NEVER to recognise an income or profit until it was actually realised but always to recognise a loss or liability as soon as it was probable. Times have changed in that IAS 37 does now allow virtually certain income or assets to be realised but recognition is restricted to >= 95% probability whereas loss / liability recognition happens at the >= 50% level …. so prudence lives on!
Hi Mike,
where does this “general principle” go from and how is it connected with accounts receivable?
I found in “Inventories standard”, that inventory should be measured at the lower of cost and net realisable value. But it doesn’t include accounts receivable.Hi Sangria
Why do you think we have a Provision for Doubtful Debts? An element of the Framework (which element was dropped from the Framework in 2010 and is now the subject of fashionable demands to have it reinstated into the Framework) is the concept of “prudence”. The Framework setters claim that “neutrality” is an appropriate inclusion instead of “prudence” but we old stagers believe that “prudence” should never have fallen out of the Framework.
Now, prudence was a fundamental concept underpinning the preparation of financial statements and, in simple terms, suggests that “profits are not to be recognised until they are actually earned whereas losses should be recognised as soon as you suspect them”
Of course IAS 37 Provisions and Contingencies has overtaken the basic principles and put more meat onto that brief explanation.
However, recognition of falls in value as soon as suspected is the basis for the creation of a Provision for Doubtful Debts
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