Allowance for Doubtful Accounts Policy

Transcription

1 Allowance for Doubtful Accounts Policy PURPOSE This policy specifies guidelines that ensure uniform accounting for allowances for doubtful accounts. EXCEPTION AUTHORIZATION All variations from this policy must be approved by the vice president responsible for control, the vice president responsible for the treasury function, or the chief financial officer. DEFINITIONS Allowances for Doubtful Accounts (Allowance): The allowance for doubtful accounts (allowance) is a valuation account used to adjust the total of the customer accounts and notes receivable to anticipated net realizable values. Charge-Offs: Charge-offs include all trade accounts receivable that have been written off because of non-collectability. Recoveries will not be netted against charge-offs. Formula Rate: The formula rate is determined by dividing the sum of the preceding X years chargeoffs by the sum of the preceding X years average annual trade receivable balances. Formula Allowance: The formula allowance is an amount determined by applying the formula rate to the estimated current year average trade receivable balance plus specifically identifiable problem notes receivable. Base Allowance: The base allowance is the greater of the sum of specifically identifiable problem accounts and notes receivable or the formula allowance (see Appendix I). Accruals: Accruals include the monthly addition to the base allowance balance to provide for estimated charge-offs to be made at midyear and year-end reviews and for anticipated changes in the base allowance. POLICY Policy Statements Maintenance and review of the allowance for doubtful accounts shall be the responsibility of the division, controlled subsidiary or joint venture. Accounts deemed uncollectible (see Appendix III) should be charged off in the month that they are determined to be uncollectible. In addition, at (Insert Date) and (Insert Date), the allowance will be adjusted to the base allowance. Source: 1

2 At interim periods, the allowance for doubtful accounts will be composed of the base allowance and accruals. In the event Company X has a receivable and a payable from a bankrupt company on the books of one or more divisions, the receivable and payable balances to be set off will be transferred to corporate accounting. PROCEDURES At (Insert Date) and (Insert Date), the allowance for doubtful accounts should be adjusted to the base allowance using the Allowance for Doubtful Accounts Computation Worksheet (see Appendix I). Any adjustment will be recorded as either income or expense. The review of the adequacy of the allowance for doubtful accounts will be conducted at midyear and year-end by the division financial manager. This will include a review of all accounts written off in the preceding six-month period. Appendix III identifies some guidelines that the reviewer should consider when reviewing accounts charged off or to determine accounts to be charged off. Following the review, the allowance computation sheet should be signed and retained at the operation for review by internal audit during normal audits. When major problem accounts surface during the interval between the mid-year and year-end review, the allowance will be adjusted upward immediately and considered in the determination of the base allowance. If an acquisition indicates a larger allowance is needed, an upward adjustment of the allowance will be made immediately. Abnormally large problem accounts and/or notes should be excluded from the base allowance and provided for separately. Adjustments to allowance balances should be recorded in the following financial consolidation accounts: (Insert Account) Allowances for Doubtful Accounts Current Provision (Insert Account) Charge-offs (Insert Account) Collections (Insert Account) Bad Debt Expense When a customer becomes bankrupt, notification should be sent to the treasury department (Corporate Policy No. ). When it is determined that a multidivisional receivable/payable exists, the treasury department will determine the amount of the receivable and payable balance to be transferred to corporate accounting via cash control. These amounts will be equal and offsetting. The transferred accounts will be monitored by the treasury department and will remain at corporate until final disposition is made by the courts. Responsibility for any shortage in the settlement of claims will remain with the divisions. Any adjustment will be cash controlled back to the divisions once the courts have determined the legitimacy and amount of such setoffs. Attached Appendices IV and V are blank worksheets that can be used to determine the base allowance and the allowance adjustment. Source: 2

3 APPENDIX I Allowance for Doubtful Accounts Computation Worksheet The following is an example of the base allowance computation for midyear and year-end. (I) Specifically identifiable problem accounts and notes receivable. Specifically identifiable problem accounts and notes receivable (II) Formula Allowance (Insert Amount) Preceding X Years Charge Off Average Annual Trade Receivable Balances (Insert Amount) (Insert Amount) (Insert Amount) (Insert Amount) (Insert Amount) (Insert Amount) (Insert Amount) (Insert Amount) (a) X Y Formula rate = (X) = (b) (Y) Formula Allowance = Estimated current year average trade receivable balance Formula rate Increase in base allowance warranted by business acquisitions during the past year Specifically identifiable problem notes Total In (Insert Month), the current years estimated charge-offs and average trade receivable balance should be used. This rate is determined at year-end and is not changed at midyear. (III) Base allowance (greater of I or II) Source: 3

4 APPENDIX II Adjustments to income or expense and to the allowance for doubtful accounts A. Ending allowance balance per books: (financial consolidation accounts X through X) B. Charge-offs C. Allowance balance after charge-offs D. Less: Base allowance from.18 III Abnormally large accounts E. If C is greater than D, enter difference as addition to income (adjust books accordingly) F. If D is greater than C, enter difference as addition to expense Source: 4

5 APPENDIX III Guidelines to consider when reviewing accounts to determine whether or not they should be charged off Accounts Placed With Collection Agencies or Attorneys Write off: Over one year with no payments Returned uncollectible Paid less than X% in the current year Bankruptcies Chapter 11 or Chapter 13 Chapter 7 If small account balance and long-term payoff, consider writing off If no payments are anticipated to be made, write off If large balance, use judgment as to write off Write off Problem Accounts not Placed with Collection Agency or Attorney or Bankrupt Write off unless X% has been realized in current year These guidelines should not be interpreted to be hard and fast rules since there may be exceptions which will require judgment. Source: 5

6 APPENDIX IV Allowance for Doubtful Accounts Computation Worksheet (I) Specifically identifiable problem accounts and notes Specifically identifiable problem accounts and notes receivable. (II) Formula allowance Preceding X Years Charge Off Average Annual Trade Receivable Balances (a) (a) Formula Rate = = (b) Formula Allowance = Estimated current year average trade receivable balance Formula rate Increase warranted by business acquisitions during the past year Specifically identifiable problem notes Total In (Insert Month), the current years estimated charge-offs and average trade receivable balance should be used. This amount is determined at year end and is not changed at midyear. (III) Base allowance (greater of I or II) Source: 6

7 Adjustments to income or expense and to the allowance for doubtful accounts A. Ending allowance balance per books: (financial consolidation accounts X through X) B. Charge-offs C. Allowance balance after charge-offs D. Less: Base allowance from.18 III Abnormally large accounts E. If C is greater than D, enter difference as addition to income (adjust books accordingly) F. If D is greater than C, enter difference as addition to expense (adjust books accordingly) Source: 7