CIRCULAR No.64-TC/TCDN OF SEPTEMBER 15, 1997 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:

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.

c- The reserve for bad debts is the reserve for projected losses from bad debts which are hard to be recovered or may not be recovered because debtors are incapable of repaying, which may occur in the plan year.

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:

The deduction for setting up the reserves (for the depreciation of unsold goods, bad debts and the depreciation of invested securities) shall not exceed the profits earned by the enterprise, (after repaying all the reserves set up in the previous year), with the following proofs:

- 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:

+ There must be the name, address and content of each debt, the amount to be received from each debtor, of which the number of bad debts must be clearly stated.

+ 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:

The enterprise must base themselves on the actual depreciation and the quantity of each kind of supplies or goods left in stock so as to determine the reserve amount according to the following formula:

The reserve for Quantities of supplies

the depreciation of and goods left in { The price accounted The actual }

supplies = stock decreased x {in the accounting - market price}

and goods for the in value on Dec. 31 {book on Dec. 31.}

plan year of the plan year

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.

b/ Setting up the reserve for the depreciation of securities:

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 Quantities of { The prices of The actual }

the depreciation depreciated { securities market }

of invested = securities on Dec. 31 x { recorded in - price }

securities for of the year of { the accounting of }

the year plan reporting { book 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.

c- Setting up the reserve for bad debts:

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:

This reserve shall be handled in the same way as the reserve for the depreciation of supplies and goods described above but it shall be included in the revenue from financial operations.

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.

- For debtors that are entities:

+ 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.

- For the debts which have been decided to be forgiven, the enterprise still has to monitor them in a separate book for at least five years and take further measures to recover them. If they are recovered, the enterprise shall account them into its irregular revenue after substracting the expenses related to their recovery.

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