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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.
13/2006/TT-BTC
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Hanoi,
February 27, 2006
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CIRCULAR
GUIDING THE REGIME OF SETTING UP AND USE OF FINANCIAL
PROVISIONS FOR IN-STOCK GOODS PRICE DECREASE, LOSS OF FINANCIAL INVESTMENTS,
BAD DEBTS AND WARRANTY FOR PRODUCTS, GOODS AND CONSTRUCTION WORKS AT
ENTERPRISES
In order to create a fair business environment for Vietnamese enterprises, the Finance Ministry
hereby guides the setting up and use
of financial provisions at enterprises
for in-stock goods price decrease, loss of financial investments, bad
debts and warranty for products, goods and
construction works, as follows:
I. GENERAL
PROVISIONS
1. Subjects of application:
Enterprises established under
the provisions of Vietnamese law (including
foreign-invested enterprises).
For joint-ventures enterprises
established on the basis of agreements concluded between the Government of the
Socialist Republic of Vietnam and foreign governments and containing provisions
on setting up and use of financial provisions different from the guidance in
this Circular, the provisions of such agreements shall apply.
2. Enterprises are allowed to
set up the following provisions:
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b/ Provision for loss of
financial investments, which means a provision for a value lost due to decrease
of prices of assorted securities invested by enterprises; and for the value of
financial investments lost due to loss-making operation of economic
organizations in which enterprises are investing.
c/ Provision for bad debts,
which means a provision for the lost value of overdue receivable debts, and
undue receivable debts which are possibly irrecoverable due to insolvency of
debtors.
d/ Provision for warranty for
products, goods and/or construction works, which means a provision for expenses
to be spent on products, goods and/or construction works which enterprises have
sold or handed over to buyers but are still
obliged to continue repairing or improving them under contracts or
commitments with such customers.
3. The four provisions defined
in Clause 2 above shall be deducted in advance as enterprises' business
operation expenses in the reporting year and constitute a financial source to
offset possible losses in the plan year, so as to preserve their business
capital and ensure that enterprises reflect the value of their supplies and
goods in stock and financial investments not higher than their market prices
and the value of their receivable debts not higher than the recoverable value
at the time of making financial statements.
4. The time of setting up and
refunding provisions shall be the end of the accounting year. Where enterprises
are allowed by the Finance Ministry to apply a financial year other than the
calendar year (which begins on January 1 and ends on December 31 each year),
the time of setting up provisions shall be the ending day of the financial
year.
Particularly, listing
enterprises which are required to make their financial statements in mid-year
may set up and refund provisions at the time of making mid- year financial
statements.
5. Enterprises must set up
councils for evaluation of the level of provisions to be set up and handling of
actual losses of supplies and goods in stock, financial investments,
irrecoverable debts according to the provisions of this Circular and other
relevant legal documents. Particularly, the provision for expenses for warranty
of products, goods and/or construction works shall be set up under contracts or
commitments with customers.
A council shall be composed of
the director, the chief accountant, heads of concerned sections and some
experts if necessary. The enterprise director shall decide on the setting up of
the council.
II. SETTING
UP AND USE OF PROVISIONS
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1. The
provision for in-stock goods price decrease:
1.1. Objects for which the
provision is set up include raw materials, materials, supplies, goods and
finished products in stock (including also in-stock goods which are
deteriorated, degraded, outmoded, technically obsolete, backward, unsold or
slowly circulated), unfinished products, charges for uncompleted services
(hereinafter referred to as in-stock goods for short), which have their
original prices recorded in accounting books higher than realizable net values,
and satisfy the following conditions:
- Having lawful invoices and
vouchers according to the Finance Ministry's regulations or other documents
proving the costs of in-stock goods.
- Being under the ownership of
stocking enterprises at the time of making financial statements.
Where raw materials and
materials have realizable net values lower than their original prices while the
selling prices of products or services made from such raw materials and
materials do not decrease, no provision for decrease of prices of such in-stock
raw materials and materials shall be set up.
1.2. Method of setting up
provisions:
The level of provision to be set
up shall be calculated according to the following formula:
Level
of provision for decrease of price of supplies and goods
=
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x
Original
price of in-stock goods recorded in accounting books
-
Realizable
net value of in-stock goods
The original price of in-stock
goods covers buying cost, processing cost and other directly related costs
according to accounting standard No. 02 - goods in stock, promulgated together
with the Finance Minister's Decision No. 149/2001 /QD-BTC of December 31,2001.
The realizable net value of
in-stock goods (value expected to be recovered) is the selling price
(estimated) of such in-stock goods minus the cost for finishing the product and
sale expense (estimated).
The levels of provision for
in-stock goods price decrease to be set up shall be calculated for each kind of
in-stock goods with decreased price and all shall be presented in a detailed
list, serving as a basis for accounting such provisions into the cost of goods
sold (production cost of all products and goods sold in the period) of the
enterprise.
Particularly for uncompleted
services, the provision set up for in-stock goods price decrease shall be
calculated for each type of service having a specific charge rate.
1.3. Handling of the provision:
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- If the amount of the price
decrease provision which must be set up is equal to the balance of the existing
provision for in-stock goods price decrease, then the enterprise shall not have
to set up such provision;
- If the amount of the price
decrease provision which must be set up is larger than the balance of the
existing provision for in-stock goods price decrease, then the enterprise shall
add the difference to the cost of goods sold of the enterprise.
- If the amount of the provision
which must be set up is smaller than the balance of the existing provision for
in-stock goods price decrease, then the enterprise shall refund the difference
as the enterprise's other incomes.
1.4. Destruction of supplies and
goods for which the provision has been set up:
a/ Unsold goods which are beyond
the expiry date, degraded, contaminated or deteriorated and therefore no longer
usable, such as pharmaceuticals, food, medical supplies, breeds, livestock and
other supplies and goods, and must be destroyed, shall be handled as follows:
A council for handling of the
enterprise's assets shall be set up to evaluate assets to be destroyed. The
evaluation minutes must specify names, quantity and value of goods to be
destroyed, reasons for destruction, value recovered from liquidation sale, and
value of actual damage.
The value of irrecoverable
actual loss of each kind of unsold goods shall be the difference between the
book value and the value recovered as a result of liquidation (compensations
paid by damage-causing persons or liquidation sale of goods).
b/ Handling competence: The
Managing Board (for enterprises with managing boards) or the Members' Council
(for enterprises with members' councils); the general director or director (for
enterprises without managing boards); or the owner of the enterprise shall base
itself/himself/herself on the minutes of the handling council and evidence
related to unsold goods to decide on the destruction of the said supplies and
goods, and the liability of persons related to such supplies and goods, and
take responsibility for their decisions before the owner and law.
c/ Accounting:
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2. The
provision for loss of financial investments:
2.1. Covered objects: securities
of all kinds and capital amounts invested by the enterprise in other economic
organizations, which fully satisfy the following conditions:
a/ For securities investments:
Being in forms of share
certificate, corporate bond, etc., invested in by the enterprise strictly
according to the provisions of law.
Being eligible for free trading
on the market and having market prices at the time of inventorying and making
financial statements lower than prices recorded in accounting books.
For securities ineligible for
free trading on the market, no price decrease provision shall be set up.
Particularly, companies
specializing in securities trading business shall not be subject to this
Circular's provisions on setting up of the provision for loss of securities
investments.
b/ For capital amounts invested
by the enterprise in economic organizations being its members, one-member
limited liability companies, limited liability companies with two or more
members, joint-stock companies, partnerships, joint-venture companies,
associated companies, and other long-term investments, a provision must be set
up if economic organizations in which the enterprise is investing suffer from
loss (except where such loss is already planned in their business plans before
investment).
2.2 Method of setting up the
provision:
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Level
of provision for securities price decrease
=
Quantity
of securities with decreased price at the time of making financial statement
x
Price
of securities recorded in accounting books
-
Actual
market price of securities
The enterprise must set up separate
provisions for each kind of investment securities with decreased price at the
time of making the financial statement and present them in a detailed list of
provisions for investment securities price decrease, which shall serve as a
basis for accounting such provisions as financial costs.
b/ For long-term financial
investments:
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Level
of provision for loss of financial investment
=
Parties'
actual capital contributions to the economic organization
-
Actual
own capital
x
Investment
capital of the enterprise
Parties'
total actual capital contribution to the economic organization
- Parties' actual capital
contributions to the economic organization are taken from such economic
organization's accounting balance sheet of the year preceding the time of setting
up the provision (Codes 411 and 412 of the accounting balance sheet,
promulgated together with the Finance Ministry's Circular No. 23/2005/TT-BTC of
March 30, 2005).
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The basis for setting up the
provision is the positive difference between the parties' actual capital
contributions and the actual own capital at the time of making the economic
organization's financial statement.
The enterprise must set up
separate provisions for each lost financial investment and present them in a
detailed list of provisions for lost financial investments. This list shall
serve as a basis for accounting such provisions as the enterprise's financial
costs.
2.3. Handling of the provision:
At the time of setting up the
provision, if the prices of securities invested by the enterprise decrease as
compared with prices recorded in accounting books, or the capital amounts
invested in economic organizations are lost due to loss-making operation of
such economic organizations, the provision for loss of financial investments
must be set up according to the provisions of Point 2.2 above;
If the financial investment loss
provision amount which must be set up is equal to the balance of the existing
provision, then the enterprise shall not have to set up such provision;
If the amount of the provision
which must be set up is larger than the balance of the existing provision, then
the enterprise shall add the difference to its financial costs.
If the amount of the provision
amount which must be set up is smaller than the balance of the existing
provision, then the enterprise shall refund the difference as its financial
operation income.
3. The
provision for bad debts:
3.1. Covered objects and
conditions: Objects covered by this provision are receivable debts which
satisfy the following conditions:
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Amounts with insufficient
grounds to be recognized as receivable debts according to these provisions must
be treated as a loss.
- Having sufficient grounds to
be recognized as bad debts, including:
+ Overdue receivable debts
stated in economic contracts, loan agreements or other debt acknowledgments.
+ Undue receivable debts of
which the indebted economic organizations (companies, private enterprises,
cooperatives, credit institutions, etc.) fall bankrupt or are undergoing
dissolution procedures; debtors are missing, have fled, are prosecuted,
detained or tried by law enforcement bodies, are serving sentences or have
deceased.
Debts which have been overdue
for three or more years shall be considered irrecoverable and handled according
to the provisions of Point 3.4 below.
3.2. The method of setting up
the provision:
The enterprise must anticipate
possible debt loss or overdue period of debts and set up provisions for each
bad debt, accompanied by evidences proving such bad debts.
- For overdue receivable debts,
the level of a provision shall be as follows:
+ 30% of the value of a
receivable debt which has been overdue for between 3 months and one year.
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+ 70% of the value of a
receivable debt which has been overdue for between two years and under three
years.
- For undue receivable debts of
which the indebted economic organizations fall bankrupt or are undergoing
dissolution procedures; debtors are missing, have fled, are prosecuted,
detained or tried by law enforcement bodies, or are serving sentences, the
enterprise shall anticipate the irrecoverable loss for setting up the
provision.
- After setting up provisions
for each bad receivable debt, the enterprise shall present all of these
provisions in a detailed list, serving as a basis for accounting them as
management costs.
3.3. Handling of the provision:
- When receivable debts are
recognized as bad ones, the enterprise must set up a provision according to the
provisions of Point 3.2 above. If the amount of the provision which must be set
up is equal to the balance of the existing provision for bad debts, then the enterprise
shall not have to set up such provision;
- If the amount of the provision
which must be set up is larger than the balance of the existing provision for
bad debts, then the enterprise shall add the difference to its management
costs.
- If the amount of the provision
which must be set up is smaller than the balance of the existing provision for
bad debts, then the enterprise shall refund the difference as its other
incomes.
3.4. Financial handling of
irrecoverable debts:
a/ Irrecoverable receivable debts
include debts in the following cases:
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+ Debtors are bankrupt or
dissolved under court decisions on declaration of enterprise bankruptcy
according to the provisions of the Bankruptcy Law or competent persons'
decisions on dissolution of indebted enterprises. In case of self-dissolution,
there must be announcements of dissolved units or certifications of agencies
having decided on the establishment of such units or organizations.
+ Debtors have terminated their
operation and become insolvent with certifications to this effect, made by
agencies having decided on the establishment of enterprises or organizations
which have carried out the business registration for such indebted enterprises.
- For individuals, there must be
following documents:
+ Death certificates (copies) or
local administrations' certifications that debtors have died without leaving
inheritance for debt payment.
+ Local administrations'
certifications that debtors are still alive or missing but unable to pay debts.
+ Law enforcement bodies' arrest
warrants or certifications against debtors who have fled, are prosecuted or
serving sentences, or local administrations' certifications that debtors or
their heirs are unable to pay debts.
- A competent authority's decision
on remission of the enterprise's irrecoverable debts (if any).
For receivable debts which have
been overdue for three or more years with insufficient evidencing vouchers or
documents as required, the enterprise's debt handling council shall be set up
to consider and handle them according to the provisions of this Clause.
b/ Financial handling:
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The enterprise shall use its
provision for bad debts or financial reserve fund (if any) to offset the actual
loss value of irrecoverable debts, and account the unoffset value as its
management costs.
Receivable debts shall,
following the issuance of the decision on handling thereof, be separately
monitored by the enterprise on its accounting book and accounting balance
off-sheet for at least five years and continue to be recovered with different
measures. Any recovered debt amounts shall, after subtracting expenses related
to the debt recovery, be accounted by the enterprise as other incomes.
c/ When handling irrecoverable
debts, the enterprise must compile the following dossiers:
- A minutes of the enterprise's
debt handling council, clearly stating the value of each receivable debt, the
value of recovered debts, and the actual loss value (after clearing recovered
amounts).
- A detailed list of remitted
debts, serving as a basis for accounting, a written record of debt comparison
certified by the creditor and debtors, or a written record of economic contract
liquidation, or certification of the agency having decided on the establishment
of the enterprise or organization, or other objective documents proving unpaid
debts, and relevant documents.
- The accounting book and documents
proving that these debts have not been recovered and, by the time of handling
debts, the enterprise is reflecting receivable debts on its accounting book.
d/ Debt-handling competence:
The Managing Board (for
enterprises with managing boards) or the Members' Council (for enterprises with
members' councils); the general director or director (for enterprises without
managing boards or members' councils); or the owner of the enterprise shall
base itself/ himself/herself on the minutes of the handling council and
evidence related to debts to decide on the handling of irrecoverable receivable
debts and take responsibility for their decisions before law and, at the same
time, apply measures to handle responsible persons according to current
regulations.
4. The
provisions for warranty for products, goods and/or construction works:
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4.2. The method of setting up
the provision:
The enterprise shall estimate
the level of provision to be set up for warranty for products, goods and/or
construction works sold or performed in the year, and set up provisions for
each kind of product, goods or construction work for which the enterprise has
committed to provide warranty. The total provision for warranty products, goods
and/or construction works shall be set up according to commitments made with
customers but must not exceed 5% of the sale turnover of such products or
goods.
After setting up provisions for
each kind of product, goods or construction work, the enterprise shall present
all of such provisions in a detailed list, serving as a basis for accounting
them as sale expenses.
4.3. Handling of the provision:
At the time of setting up the
provision, if the actually paid amount for warranty is larger than the amount
set aside as the provision, the negative difference shall be accounted as sale
expense. If the warranty provision amount which must be set up is equal to the
balance of the existing provision, then the enterprise shall not have to set up
such warranty provision;
If the amount of the provision
which must be set up is larger than the balance of the existing warranty
provision, then the enterprise shall add the difference to its sale expenses.
If the amount of the provision
which must be set up is smaller than the balance of the existing warranty
provision, then the enterprise shall refund the difference as its other
incomes.
Upon the expiration of the
warranty duration, if no warranty amount is spent or the set-up provision
amount has not been used up, the balance shall be refunded as other incomes.
III.
IMPLEMENTATION PROVISIONS:
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2. The setting up of provisions
of credit institutions shall comply with the provisions of legal documents
guiding the financial regime applicable to credit institutions.
3. Enterprises must elaborate
regulations on management of supplies, goods and debts in order to minimize
business risks. For debts and goods, such a regulation must clearly define the
responsibility of each section or each person for monitoring and managing goods
or recovering debts.
Enterprises are strictly
prohibited from taking advantage of the setting up of provision to additionally
calculate into their expenditures groundless provision amounts with a view to
shirking their budget remittance obligations. Enterprises which intentionally
commit such violations shall be handled like tax evaders according to the
current provisions of law.
4. Any problems arising in the
course of implementation should be promptly reported to the Finance Ministry
for study, amendment and supplement.
FOR
THE FINANCE MINISTER
VICE MINISTER
Tran Van Ta