OVERDUE PAYMENT

PUBLICATIONS \ 20.05.2019

In the activities of companies and their contractors, arrears often arise. In most cases, the debts of enterprises “hang” for a long time. And if an overdue payment turns out to be unpaid at all, what to do in this case? Diana Goreva, Acsour’s Accountant, gained insight on the nuances of writing off bad debt and told the “Raschet” magazine about them.

Before we start solving the problem, let us define the concept of “bad debt”. According to article 266 of the Tax Code of the Russian Federation, debts that meet a number of conditions are recognized as bad ones:

• the debt is not paid in due time;
• the statute of limitations has expired (it is three years from when the debt should have been paid); debts for which, in accordance with civil legislation, the obligation is terminated as a result of the impossibility to fulfil it, on the basis of a certificate of a state authorities or the liquidation of an organization;
• it is not possible to determine the location of the debtor and its property or to obtain information about the presence of monetary funds and other valuables belonging to it that are on accounts, deposits or in custody in banks or other credit organizations; the debtor does not have any property;
• the company or individual is declared bankrupt and is released from all obligations to creditors.

WRITE-OFF OF ACCOUNTS RECEIVABLE

Accounts receivable for which the statute of limitations has expired, and other debts that are unrealistic for collecting arrears should be written off according to inventory data, in accordance with the Order No. 34n of the Ministry of Finance dated July 29, 1998.

If the organization applied to the court for debt collection and presented the writ of execution to the bailiffs, to recognize the debt as a bad one, the company should wait for the resolution on the termination of enforcement proceedings and return of writs of execution or exclusion of the contractor from the Unified State Register of Legal Entities.

The write-off transaction should have a written justification (accounting estimate memorandum) and an order from the head of the organization. The debt is written off against the bad debt provision. If the provision was not accrued for the previous period or the amount of debt exceeds the amount of provision, then all, that is over it, is written off against the finance result.

The bad debt provision is formed without fail, and its amount is determined based on the result of the inventory of accounts receivable carried out on the last day of the reporting period (clause 4 of article 266 of the Tax Code of the Russian Federation).

Despite the fact that the debtor cannot be liable to creditors for its obligations, the debt is not cancelled. It remains in an off-balance sheet account for five years in case the debtor’s financial situation changes.

EXAMPLE

When writing off accounts receivable, the accountant should make the following entries: Debit 62 Credit 62 – write-off of accounts receivable against the bad debt provision (supporting document: accounting estimate memorandum, reconciliation report);

Debit 007 – the debt on the off-balance sheet account for further monitoring is reflected (supporting document: accounting estimate memorandum, reconciliation report);

Debit 91.2 Credit 62 – accounts receivable is written off without provision (supporting document: accounting estimate memorandum, reconciliation report);

Debit 007 – the debt on the off-balance sheet account for further monitoring is reflected (supporting document: accounting estimate memorandum, reconciliation report);

Debit 51 Credit 91.1 – the collected debt was transferred to the settlement account (supporting document: bank statement);

Credit 007 – the collected debt is written off from the off-balance sheet account (supporting document: accounting estimate memorandum).

WRITE-OFF OF ACCOUNTS PAYABLE

Accounts payable are issued using the same documents as for accounts receivable. If the supplier has not shipped the goods or provided services but has already received an advance payment, he has to pay VAT on receipt of advance payment but not to accept it for deduction, until the returning of advance payment or provision of services (letter No. 03-03-06/1/635 of the Ministry of Finance of Russia dated December 7, 2012). This write-off is the organization’s income and is subject to profits tax and the Simplified Tax System.

However, if the debtor is not the supplier, but the buyer, then VAT does not need to be recovered, since the basis for deduction is an invoice sent to the buyer as a fact of service provision or confirming the shipment of goods, regardless of payment. Such arrears will be considered as expenses by the supplier and income by the buyer in tax and accounting records.

This means that if the supplier received an advance payment, but did not provide services or did not ship the goods, they will pay VAT. At the same time, the supplier will not be able to accept VAT for a deduction or set it off in expenses.

If the buyer received the goods but could not pay, VAT can be deducted, and in this case the buyer is in more advantageous position.

When applying the Simplified Tax System it is impossible to take into account bad debt as an expense in the “income minus expenses” system (letter No. 03-11-06/2/9909 of the Ministry of Finance of Russia dated February 20, 2016) and when taking into account only “income” the tax base is not corrected (letter No. 03-11-11/28614 of the Ministry of Finance of Russia dated July 22, 2013). Therefore, when applying the Simplified Tax System, there are no positive points in working with bad debts.

EXAMPLE

Entries when writing off accounts payable will be as follows:

Debit 62 Credit 91.1 – accounts payable are written off (from the supplier) as an organization’s income (supporting document: accounting estimate memorandum, reconciliation report);

Debit 60 Credit 91.1 – accounts payable are written off (the buyer owes the supplier) as income of the organization (supporting document: accounting estimate memorandum, reconciliation report);

Debit of 66,67 Credit 91.1 – accounts payable are written off on obtained credits and loans (supporting document: accounting estimate memorandum, order);

Debit 76 Credit 91.1 – the deposited salary is written off if it is paid from the cash register (supporting document: accounting estimate memorandum, order).

Another important point when writing off accounts receivable or payable is the period in which the taxpayer has the right to reflect the debt in the accounting. Subsequently, when writing off accounts receivable it is necessary to manage to reflect arrears in the period in which occurred the grounds for acknowledgement of debt as a bad one (letter No. 03-03-06/1/4995 of the Ministry of Finance of Russia dated February 6, 2015, the letter No. 16-15/035618.1@ of the Federal Tax Service Directorate of Russia in Moscow dated April 13, 2011). And for accounts payable, it is necessary to be guided by the clarifications in the letter No. GD-4-3/25307@ dated December 8, 2014. In accordance with this document, the moment of write-off occurs on the last day of the reporting period in which the statute of limitations expires.

ALTERNATIVE METHODS

Apart from write-off of debt, the company has the option to turn hung arrears into money through the sale of the debtor’s obligations to a third-party organization, unless, otherwise is stipulated in the contract or contradict the requirements of article 388 of the Civil Code of the Russian Federation.

EXAMPLE

When selling a debt to the seller, it is necessary to make entries in the accounting:

Debit 76 Credit 91.1 – revenue from sale of debt is indicated (supporting document: bank statement, contract on assignment of rights);

Debit 91.2 Credit 62 – the amount of debt sold is written off (supporting document: accounting memorandum);

Debit 91.2 Credit 68 – VAT is reflected.

The buyer will have the following entries when selling the debt:

Debit 58 Credit 76 – acquisition of debt (supporting document: contract on assignment of rights);

Debit 76 Credit 91.1 – income from debt payment is reflected (supporting document: bank statement);

Debit 92.1 Credit 58 – the amount spent on the acquisition of debt is reflected (supporting document: contract on assignment of rights);

Debit 92.1 Credit 68 – if the amount of debt payment exceeds the amount transferred to the initial creditor, VAT should be accrued on the excess amount (supporting document: contract on assignment of rights).

The debtor’s accountant should make the following entries when selling the debt:

Debit 60 Credit 60 – obligations transferred from one contractor to another (supporting document: contract on assignment of rights or notification of transfer of rights to recover debts);

Debit 60   Credit 51 – debt is paid (supporting document: payment order).

The new creditor is provided with all supporting documents, from which it is possible to draw a firm conclusion about the fact of the existence of the debt. After that, it is necessary to notify the debtor of the transfer of rights to recover debts to third parties.

When selling debt, the company takes into account the negative difference between sales income and the amount of debt as a loss. If the payment term for the assigned claim has already come, the loss is recognized in full (clause 2 of article 279 of the Tax Code of the Russian Federation). But if the debt is sold before the term for its payment occurs, the amount of the recognized loss is taken into account in accordance with clause 1 of article 279 of the Tax Code of the Russian Federation. Also, when selling, the tax base for VAT is determined and an invoice is issued, even if the debt was sold at the nominal price or lower (in this case, VAT payable will not be accrued).

Given the above, we can draw the following conclusions: in order for the debt to be recognized as bad one, it should fully meet all the conditions, the debtor has no choice – to pay or not.

If the organization has assets to fulfil obligations to contractors, the debt can be paid through the court and bailiffs. This procedure is labour-intensive for the company, because it is necessary to meet the required conditions and meet the deadline. However, in case of complying with all the above-mentioned nuances and proper documenting, the procedure is quite feasible.