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THE MINISTRY OF
FINANCE
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SOCIALIST
REPUBLIC OF VIET NAM
Independence - Freedom - Happiness
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No. 64/TC-TCDN
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Hanoi, September
15, 1997
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CIRCULAR
GUIDING THE SETTING
UP AND USE OF THE RESERVE FOR THE PRICE DECREASE OF UNSOLD GOODS, THE RESERVE
FOR BAD DEBTS AND THE RESERVE FOR THE PRICE DECREASE OF SECURITIES OF STATE
ENTERPRISES
In furtherance of Decree No. 59-CP of October
3, 1996 of the Government issuing the "Regulation on the financial
management and business cost-accounting of State enterprises", the
Ministry of Finance hereby provides the following guidance for the setting up
and use of the reserve for the depreciation of unsold goods, the reserve for
bad debts and the reserve for the depreciation of securities in financial
operations of State enterprises:
I. GENERAL PROVISIONS
1. This Circular applies to State enterprises
engaged in production and business activities, including: Corporations, member
enterprises of Corporations, other independent cost-accounting State
enterprises which can determine their turnover, expenditures, profits and
losses (hereafter referred to as State enterprises for short).
2. In this Circular, the following terms are
construed as follows:
a- The reserve for the price decrease of unsold
goods is the reserve for projected losses that may affect the production and
business results due to the depreciation of unsold supplies, finished products
and goods which may occur in the plan year.
b- The reserve for the price decrease of
securities in financial operations is the reserve for projected losses due to
the depreciation of securities of an enterprise, which may occur in the plan
year.
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3. The time of setting up and inclusion of the
reserves: The setting up of the reserve for the depreciation of unsold goods,
the reserve for bad debts and the reserve for the depreciation of securities in
financial operations shall be carried out at the closing of the accounting book
to make the annual financial statement.
4. Advance deduction of the three above-said
reserves into the operational expenditures of the year of reporting implies the
recognition in advance of the amount of possible losses in the plan year,
helping enterprises to have the necessary financial sources to make up for such
three kinds of possible losses in the plan year so as to preserve their
business capital. The enterprises shall determine on their own the level of
deductions, use each reserve for the right purpose and comply with the following
provisions:
II. SETTING UP AND USE OF THE RESERVES
1. Objects and conditions for setting up loss
reserves:
a- Objects for which reserves may be set up:
- Principal supplies used for production, unsold
materials, goods, and finished products the market prices of which are lower
than the prices recorded in the accounting book (hereafter referred to as
supplies and goods for short).
- Securities invested by enterprises with their
prices being depreciated compared to their prices recorded in the accounting
book.
- Bad debts.
b- Conditions for setting up the reserves:
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- Regarding unsold supplies and goods:
+ Supplies and goods left in stock at the time
the financial statement is made with their market prices lower than those
recorded in the accounting book.
+ Supplies and goods which are commercial
commodities owned by the enterprise.
+ Having proper and valid vouchers and invoices
or other documents certifying the prices of the unsold supplies and goods.
- For securities with lowered prices:
+ Securities invested by an enterprise under the
provisions of law.
+ Securities freely traded on the market with
their market prices lower than those recorded in the accounting book at the
time of stock-taking and making a financial statement.
The depreciation reserve shall not be set up for
those securities which are not allowed to be freely traded on the market.
- For bad debts:
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+ To have grounds for setting up the bad debt
reserve, an enterprise must have the original documents or certification by the
debtor of the unpaid debt, including the economic contract, the borrowing
contract, the contract liquidation report, a debt commitment or debt
statement...
The bases for recognition as bad debts include:
- The debt has been overdue for two or more
years from the date of debt payment written in the economic contract, borrowing
contract or debt commitment, and the enterprise has made repeated claims but
still failed to recover the debt.
+ In special case, although the debt has not
been overdue for two years the debtor is being considered for dissolution,
bankruptcy or has fled or is temporarily detained or tried by the law
enforcement agencies... such debt is also considered bad debt.
c/ No reserve is allowed to be set up for those
unsold supplies, goods, bad debts, and securities which lack the conditions
prescribed above.
d/ Each enterprise must set up a council for
evaluating the level of depreciation of supplies and goods left in stock, of
securities, and determining bad debts.
The council shall be set up by the enterprise's
director and must be comprised of the director, the chief accountant and the
head of the supplies or business section.
2. Method of setting up the reserves:
a/ Setting up the reserve for the depreciation
of supplies and goods left in stock:
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The reserve for
the depreciation of supplies and goods for the plan year
=
Quantities of
supplies and goods left in stock decreased in value on Dec. 31 of the year of
reporting
x
The price
accounted in the accounting book
-
The actual
market price on Dec. 31
The actual market prices of supplies, finished products
and goods left in stock on December 31 are the buying or selling prices on the
market.
The setting up of the reserve must be done
separately for each kind of depreciated supplies or goods and sum them up into
a detailed list of the unsold goods reserve of the enterprise. Such list shall
serve as the basis for accounting the reserve into the managerial cost of the
enterprise.
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The enterprises must set up a reserve for the
depreciation of each kind of invested securities on December 31 of the year
plan, according to the following formula:
The reserve for
the depreciation of invested securities for the plan year
=
Quantities of
depreciated securities on Dec. 31 of the year of reporting
x
The prices of
securities recorded in the accounting book
-
The actual
market price of securities
Each enterprise must set up the reserve
separately for the depreciation of each kind of securities and sum them up in a
detailed list of the reserves for the depreciation of invested securities,
which shall serve as basis for such reserves to be accounted for in the costs
of its financial operations.
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On the basis of the objects and conditions for
setting up the reserve for bad debts stated in Points 1a and 1b of Section II
above, each enterprise must set up a reserve for each bad debt, project the
amount of possible losses in the plan year, accompanied with evidences proving
the above-said bad debts.
After setting up the reserve for each bad debt,
the enterprise shall sum up these reserves in a detailed list which shall serve
as basis for such reserves to be accounted for in its managerial costs of the
enterprise.
The amount of the total bad debt reserve shall
not exceed 20% of the enterprise's total debts receivable on every December 31
and ensure that the enterprise suffers from no loss.
3. Handling the reserves:
The purpose of setting up the reserves is to
make up for the losses due to the depreciation of goods left in stock, bad
debts and the price decrease of invested securities. Yet, according to the
current accountancy accounting principles, these losses have been reflected in
the business result, the enterprise must include all the reserves in its
income. Specifically:
a/ For the reserve for the decrease in the
prices of supplies and goods left in stock:
The enterprises must include all the reserves
set up at the end of the previous year in their irregular revenues so as to
determine their business results. At the same time, they shall set up new
reserves for the following year according to the above provisions.
The time of the inclusion of reserve already set
up for the depreciation of supplies and goods and the setting up of new reserve
shall coincide with the time when the accounting book is closed to make the
annual financial statement.
b/ For the reserve for the depreciation of
invested securities:
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c/ For the reserve for bad debts:
- The enterprises must include the reserve for bad
debts already set up in the previous year into their irregular revenues so as
to determine their business results. In the mean time, they shall set the new
reserve for the following year according to the above provisions.
- The time for the inclusion of the bad debt
reserve already set up and the setting up of a new reserve shall coincide the
time when the accounting book is closed to make the financial statement.
4. Forgiving bad debts:
a/ Bad debts to be forgiven must have one of the
following evidences:
- For debtors that are legal persons:
+ The Court decisions allowing the enterprises
be bankrupt under the Law of Bankruptcy.
+ The competent agency's decision to dissolve
the enterprises as provided for in Decree No. 50-CP of June 28, 1996 of the
Government on the establishment, reorganization, dissolution and bankruptcy of
State enterprises.
+ Other decisions of competent agencies as
prescribed by law.
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+ The debtor still exists but has sufficient
evidences proving its incapability of debt payment.
+ The warrant of arrest or certification of a
law enforcement agency that the debtor has fled or is serving a sentence.
+ The debtor has died or is incapable of debt
payment, which is certified by the local administration.
b/ Handling competence:
- The Managing Boards (for corporations and
enterprises with Managing Boards) and Directors (for independent enterprises
without a Managing Board) shall base themselves on the evidences described in
Item a, Point 4 of Section II to decide to forgive bad debts and shall take
responsibility for their decisions before the State and law and, at the same
time, take handling measures according to current regulations.
- Upon forgiving a debt, there must be a record
of the debt handling council clearly stating the value of the already recovered
amount and the remaining debt amount (after substracting the recovered amount),
and make a detailed list of debts already forgiven to serve as accounting
basis.
c/ The actual loss from each debt is the remainder
of the debt written in the accounting book after substracting the recovered
amount (compensated by the damaging party, proceeds from the sale of the
debtor's property and property distributed by decision of the Court or other
competent agencies).
d/ Cost-accounting:
- The actual loss from the bad debt as a result
of forgivance shall be accounted in the enterprise's managerial costs.
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III. IMPLEMENTATION PROVISIONS
1. This Circular takes effect from January 1,
1997, all the previous provisions (if any) on the setting up and use of
reserves which are contrary to this Circular shall be annulled.
2. The financial agencies of various levels
shall have to popularize this Circular to the State enterprises and guide and
supervise them in their setting up and use of the reserves for the depreciation
of supplies and goods left in stock, bad debts and the price decrease of
securities in compliance with this Circular.
In the course of implementation, any arising
problem shall be reported by State enterprises to the Ministry of Finance for
study and additional guidance.
FOR THE
MINISTER OF FINANCE
VICE MINISTER
PHAM VAN TRONG