The provision amounts you need to pay attention

Inside, the main provision amounts have a significant impact on the results of production – their businesses, but investors need to grasp the nature of the review process of the company financial statements

Account provisioning inventories discount, discount provision of financial investments, the account provisioning for doubtful debts and provision for product warranties, goods, works construction (for construction companies).


The nature of the account provisioning

The most common understanding, a provision for liabilities are not sure about the value or duration. The provision is understood as the recognition at the expense of smaller businesses the difference of the value of the assets of the company at the date of the financial statements and the value of these assets at the time of purchase, or recorded a Provisions corresponding to the liabilities (based on giving a reliable estimate), because it is the obligation of the current liabilities and make sure that an outflow of economic benefits to payment obligations to pay that debt. Inside:

Provision for decline in inventories is the reserve for the value lost due to the price of materials and finished goods, inventory is reduced (Circular 13/2006 / TT-BTC guiding the setting up and use Provisions…).

Some diminution in value of inventories is established as the difference between the original price of larger inventories net realizable value of them (Vietnam Accounting Standards No. 02 – Inventories).

Terminology: the price of inventories is understood that the value of inventory is recorded at the time of purchase based on the invoice price and other costs directly related to the purchase and production to the inventories in place and ready for their use or consumption, such as the cost of processing, processing, transportation costs, warehousing …

The term net realizable value of inventories is now understood as the carrying value of inventory price after deducting the estimated costs for the completion and sale of products at the time of report financial statements;

Provision for diminution in value of financial investment: prevention is the value lost due to investment securities of companies was discounted; the value of financial investments suffer losses owing to the economic organization that enterprises are investing loss (Circular 13/2006 / TT-BTC);

Provision for doubtful debts: is a provision for loss of value debts overdue receivables, receivables past due but can not irrecoverable debtors due to inability to pay ( Circular 13/2006 / TT-BTC);

Provision for product warranties, goods, civil works: the redundancy costs of products, goods, civil works were sold, was handed over to the buyer, but businesses still have an obligation to continue repair, improvement or contractual commitments with customers (Circular 13/2006 / TT-BTC).

Principles for provision

According to the Vietnam Accounting Standards No. 18 – “Provisions, contingent liabilities and assets”, a provision permitted only made when fully satisfying the following conditions:

DN current liabilities (liabilities or obligations of solidarity) as a result of an event that occurred.

An outflow of economic benefits that may occur resulting in the requirement to pay debt obligations;

Give a reliable estimate of the value of the obligation.

Event happened

An event occurred giving rise to current liabilities is known as a binding event. An event becomes binding events if the company has no choice but to pay debt obligations caused by such events.

This only occurs: a) when the payment obligation required by law; or b) when there is the obligation of solidarity, the event (which may be an operation of companies) have led to a reliable estimate for third-party companies will certainly pay that liability.

The nature of financial statements (FS) of the company is intended to present the financial position of the company at a time and an era happened earlier, so the reserves are not intended to reflect the necessary costs for the operation of enterprises in the future, but only in relation to events occurring independently in the past, but that affect the economic interests of businesses in the future through a debt obligations incurred.

For example, companies perform provision for a liability due to violations of environmental laws. This paragraph is received by the business activity took place before the company, but that affect the economic interests of businesses in the future, rather than the amounts received by the operation of enterprises in the future .

The decline in economic benefits may occur

Conditions for recognition of a liability is debt that is existing debt and potentially diminish the economic benefits due to the payment of such debts.

The recognition of a provision account (liabilities) must be accompanied by conditions arise affecting the economic interests of businesses in the future through the payment obligation (in the example above the main as payment for fines clause).

However, businesses do not necessarily have to identify specific partners benefit from debt obligations of the company (with the example above, the business may have to pay the cost of overcoming the impact on the environment and people benefit the community in general).

Reliable estimate of the obligation to pay

The provision amounts in nature are built on the basis of estimates, this is an important basis, but it does not take away the credibility of the data on the financial statements if the company launched the bases trust for work estimated amounts set aside (the debts). This is also a requirement for companies to present the provision amounts on the financial statements.

In the case of companies that lack a reliable basis for estimating the obligation for the provision, companies will recognize this debt as a sum estimated “contingent liabilities” in the financial statements (which refers to the paragraph DN debt that can be estimated, but the possibility arises is uncertain, so companies must be presented separately according to the criteria specified in the Vietnam accounting Standard No. 18).

Method of provision for diminution in value of inventories

Audience: According to Circular No. 13/2006 / TT-BTC guiding the regime of setting up and using the reserves, the provision for diminution in value of inventories is made for materials and tools used for production, materials, goods, finished goods inventory (inventory including damaged and poor, deteriorating quality, fashionable backward, backward technology, outdated, stagnant, slow-moving), unfinished products, the cost of uncompleted services.

The allocation to be made when the original price recorded on accounting books higher net worth can be done and must ensure that: invoices, legal documents as stipulated by the Ministry of Finance or other evidence cost of inventories invention; supplies and goods are owned by companies inventory at the time of financial statements (FS) (in the case of materials used as the main raw material production, with net realizable value is lower than the original price, but the price of goods and services produced from this raw material is not reduced their prices, businesses will not be provisioning).

Provisioning methods: the diminution in value of inventories should be set aside by subtracting the volume of inventory at the time of financial statements (x) at the price of inventories in accounting books, then subtract ( -) net realizable value of inventories is now.

For example, at day 31/12, DN 100 tons of products a stock, original price of this product (including direct costs and the cost of other production and processing to finished product) is 100 dong . Also at this time, the price of products on the market are 80 A / ton.

Assumptions related expenses estimated to consume the product is 10 / ton, ie net value realizable by a unit of product A is 70 / ton (80-10), while that businesses need to set aside a provision for diminution in value of inventories is: 100 tonnes x (100 copper – copper 70) = 3,000 VND.

Note: The value of the provision for diminution in value of inventory will be accounted for in an enterprise account with a negative balance hanging on the balance sheet accounting and accounting increased COGS item in the period; DN must show the basis to determine the items of inventory at cost, net realizable value of inventories is now on the notes to the financial statements; Listed companies are required to publish periodic financial information will have to make provision for diminution in value of inventories, if at the time of the financial statements, the original price of the company’s inventory is lower than net realizable value performed.

Handling of provision for diminution in inventory value on date of financial statements: at each date of the financial statements, companies must consider the balance of provision for diminution in value of inventories and balance appropriation provision for decline Storage provisioning needs: if the diminution in value must be set up by the balance of provision for diminution in value of inventories, the companies not required to make provision for diminution in value of inventories; if the diminution in value must be set higher than the balance of provision for diminution in value of inventories, the enterprise shall add items of DN COGS for the difference; if the amount of the provision must be set lower than the balance of provision for diminution in value of inventories, the enterprise shall refund the difference to the other income items.

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