In order to create an equitable business environment for enterprises of all economic sectors in compliance with the provisions of the Law on State Enterprises, the Law on Enterprises and the Law on Foreign Investment in Vietnam, the Ministry of Finance hereby guides the setting up and use of reserves for decrease of prices of unsold goods and investment securities and for bad debts at enterprises, as follows:

I. GENERAL PROVISIONS

1. Application objects:

- State enterprises;

- Enterprises operating under the Enterprises Law;

- Joint-venture enterprises, enterprises with 100% foreign capital, foreign parties to business cooperation contracts (hereinafter referred to as foreign business cooperation parties for short), which operate under the Law on Foreign Investment in Vietnam;

For joint-venture enterprises established on the basis of agreements concluded between the Government of the Socialist Republic of Vietnam and foreign governments, if such agreements contain provisions on the setting up and use of reserves other than those guided in this Circular, the provisions of such agreements shall apply.

2. In this Circular, the following terms shall be construed as follows:

a/ In-stock goods price decrease reserve means a reserve for the lost value due to the decrease of prices of supplies, finished products and goods in stock which may occur in the plan year.

b/ Investment securities price decrease reserve in financial activities means a reserve for lost value due to the decrease of prices of securities of various types of enterprises which may occur in the plan year.

c/ Bad collectible debt reserve means a reserve for the lost value of collectible debt amounts, which may be irrecoverable due to the fact that indebted units or debtors are insolvent in the plan year.

3. The time of setting up and refunding reserves: The setting up and refund of the reserve for in-stock goods price decrease, the reserve for bad collectible debts and the reserve for securities price decrease in financial activities shall all be carried out at the time of closing accounting books to make annual financial reports.

In cases where an enterprise is 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 reserves shall be the ending day of the financial year.

4. The aforesaid three reserves shall be deducted in advance as enterprises� business operation costs in the reporting year and constitute a financial source to help enterprises make up for such three kinds of possible losses in the plan year, so as to preserve their business capital and ensure that they reflect the value of their supplies and goods in stock, investment securities and the value of collectible debts not higher than their market prices or recoverable values at the time of making financial reports.

5. Basing themselves on actual fluctuations of prices of goods in stock, securities as well as bad collectible debts, enterprises shall, at their own initiative, determine the level of each reserve to be set up and used for the right purposes, and handled according to the following specific provisions:

II. SETTING UP AND USE OF RESERVES

1. Objects and conditions for setting up loss reserves:

a/ Objects for which reserves may be set up:

- Raw materials, materials and tools used for production, supplies, goods and finished products in stock, the market prices of which are lower than the prices recorded in accounting books (hereinafter referred to as supplies and goods for short).

- Securities invested by enterprises with decreased prices as compared to their prices recorded in accounting books.

- Bad collectible debts.

b/ Conditions for setting up reserves:

The setting up of the reserves (for the decrease of in-stock goods prices, bad collectible debts, decrease of investment securities prices) must satisfy the following conditions:

- For supplies and goods in stock:

+ Their cost prices are evidenced by lawful invoices and vouchers as prescribed by the Finance Ministry, or other proofs.

+ They are under the ownership of enterprises having unsold stocks at the time of making financial reports with their recovered value or market prices lower than those recorded in accounting books.

In-stock supplies and goods with decreased prices as compared with those recorded in accounting books include: degenerated, inferior-quality or faulty supplies and goods left in stock, or those with selling prices decreased together with the common market price level.

In cases where the in-stock supplies and goods with their value depreciated as compared with that recorded in accounting books but the selling prices of service products turned out from such supplies and goods do not decrease, no reserve for decreased prices of such in-stock supplies and goods shall be set up.

- For securities with decreased prices:

+ They are invested by enterprises in strict compliance with provisions of law.

+ They are subject to free trading on the market and, at the time of making inventory and financial reports, have their market prices decreased as compared with those recorded in accounting books.

For securities not allowed to be freely traded on the market, no price decrease reserve shall be set up.

- For bad collectible debts:

+ There must be the name and address of each indebted unit or debtor and amount to be collected therefrom, as well as the content of each debt in which the bad collectible debt amount must be clearly stated.

+ In order to have grounds for setting up reserve for bad collectible debts, enterprises must have original vouchers or certification of indebted units or debtors on debt amounts not yet repaid, including: economic contracts, loan agreements, written records on contract liquidation, debt repayment covenants, debt comparison, etc.

Bases for debts to be recognized as bad debts:

+ Collectible debts, which have been overdue for two or more years from the debt collection due date written in economic contracts, loan agreements or debt repayment covenants, and have been claimed for many times by enterprises, but are not yet recovered.

+ For special cases where the overdue period is still less than 2 years, but the indebted units are being considered for dissolution, bankruptcy or the debtors show signs of fleeing or are subject to prosecution, detention and/or trial by law enforcement bodies, involved debts shall be recognized as bad debts.

c/ No reserve is allowed to be set up for those in-stock supplies and goods, bad collectible debts and securities which fail to fully meet the conditions prescribed above.

d/ Each enterprise must set up a council for evaluating the decreasing level of prices of in-stock supplies and goods and securities, and determining bad collectible debts.

The council shall be set up by the enterprise director and must be composed of the director, the chief accountant, the head of the supplies or business section.

2. Method of setting up reserves:

a/ Setting up the reserve for the decrease of prices of in-stock supplies and goods:

Enterprises must base themselves on the actual price decrease and quantity of each kind of supplies or goods in stock to determine the reserve level according to the following formula:

Reserve Quantity of
level for price in-stock supplies [ Actual market ]
decrease of and goods with [ Price recorded price at the time ]
supplies and = decreased prices x [ in accounting - of making ]
goods for the at the time of [ book annual financial ]
plan year making annual [ report ]
financial report

The actual market prices of in-stock supplies, finished products and goods at the time of making annual financial reports are prices at which such supplies, finished products and goods can be bought or sold on the market.

The setting up of the reserve must be carried out separately for each kind of supplies or goods with decreased prices and sum them up into a detailed list of the enterprise�s reserves for in-stock supplies and goods price decrease. Such a list shall serve as basis for accounting the reserve into the enterprise�s management costs.

b/ Setting up of the reserve for investment securities price decrease:

Enterprises must set up a reserve for each kind of investment securities with their prices decreasing at the time of making the annual financial report of the reporting year, according to the following formula:

Reserve Quantity of securities [ Price ]
level for price with decreased [ of securities Actual ]
decrease of = prices at the time x [ recorded in - market price ]
securities for of making annual [ accounting of securities ]
the plan year financial report [ book ]

Each enterprise must set up a separate reserve for each kind of securities with decreased price and sum them up into a detailed list of its reserves for investment securities price decrease, which shall serve as basis for accounting such reserves into its financial operation costs.

c/ Setting up of the reserve for bad collectible debts:

On the basis of the objects and conditions for setting up the reserve for bad debts prescribed at Points a and b, Clause 1, Section II above, enterprises must anticipate possible debit losses in the plan year and set up a reserve for each bad collectible debt, accompanied by evidences proving the above-said bad debts.

After setting up the reserve for each bad collectible debt, enterprises shall sum up all those debt reserves into a detailed list, which shall serve as basis for accounting such reserves into the enterprises� management costs.

The total bad debt reserve amount shall not exceed 20% of the enterprises� total collectible debit balance at the time of making annual financial reports.

3. Handling of reserves:

The already set up reserves for the decrease of prices of in-stock supplies and goods, investment securities and bad debts shall be included in the enterprises� income in the period, if such in-stock supplies and goods have actually been used for production and business or sold without any price decrease, or debts have been recovered. More concretely as follows:

a/ For the reserve for decrease of prices of in-stock supplies and goods:

At the end of each year, enterprises having supplies and goods in stock with decreased prices as compared with their value recorded in accounting books shall have to set up the reserve for decrease of prices of in-stock supplies and goods according to the above regulations;

If the price decrease reserve to be set up in the plan year is equal to the balance of the reserve amount set up in the previous year, enterprises shall not have to set aside any reserve for decrease of prices of in-stock supplies and goods from their management costs.

If the to be-set up price decrease reserve is larger than the balance of the reserve set up in the previous year, enterprises shall set aside from their management costs the difference between the said reserve amounts.

On the contrary, if the reserve to be set up in the plan year is smaller than the balance of the supplies and goods price decrease reserve set up in the previous year, enterprises shall have to incorporate in other incomes the difference between the said reserve amounts.

The time of incorporating the already set up supplies and goods price decrease reserve and setting up a new reserve shall coincide with the time of closing the accounting books for making annual financial reports.

b/ For the reserve for decrease of prices of investment securities:

This reserve shall be handled in the same way as the above-said reserve for decrease of prices of in-stock supplies and goods, but the reserve value shall be incorporated in the income from financial operations.

c/ For the reserve for bad collectible debts:

As soon as collectible debts are recognized as bad debts, enterprises shall have to set up a reserve therefor according to the above regulations. If the reserve to be set up in the plan year is equal to the balance of the bad collectible debt reserve, enterprises shall not have to set aside more reserve.

If the to be-set up decrease reserve is larger than the balance of the reserve set up in the previous year, enterprises shall set aside from their management costs the difference between the said reserve amounts.

On the contrary, if the reserve to be set up in the plan year is smaller than the balance of the bad collectible debt reserve set up in the previous year, enterprises shall have to incorporate in other incomes the difference between the said reserve amounts.

The time of incorporating the already set up bad collectible debt reserve and setting up a new reserve shall coincide with the time of closing the accounting books for making annual financial reports.

4. Remission of irrecoverable debts:

a/ Each irrecoverable debt, when being written off, must be accompanied by:

- Written record of the enterprise�s debt-handling council, in which the value of each collectible debt, the value of recovered debt, the actual loss value (after subtracting recovered amounts) must be clearly stated.

- Detailed list of already written-off debts, which serves as basis for accounting.

- Court decision on enterprise bankruptcy according to the Bankruptcy Law or the competent person�s decision on dissolution of the indebted unit.

- Local administration�s written certification that the debtor has died without leaving inheritance for debt repayment.

- Local administration�s written certification that the debtor is still alive but incapable of repaying debts.

- A law enforcement body�s arrest warrant or certification against the debtor who has fled, is prosecuted or serving sentence but the time limit of 2 years from the owing date has expired.

- A competent authority�s decision on remission of the enterprise�s irrecoverable debts.

b/ Competence to handle debts:

- Managing boards (for enterprises having managing boards) or members� boards (for enterprises having members� boards); general directors, directors (for enterprises without managing boards) or enterprises� owners shall base themselves on evidences related to debts to decide on remission of collectible debts which have not been recovered, and take responsibility before the State and law for their decisions, and at the same time apply measures for handling liability according to the current regime.

c/ The actual loss of each irrecoverable debt is the remainder of the collectible debit balance recorded in the accounting book after subtracting the already recovered debt amount (compensation made by the damaging party, proceeds from the auction of assets of the indebted unit or the debtor, divided assets under decisions of court or other competent agencies).

d/ Accounting:

- Actual lost value of irrecoverable debts, which have been remitted, shall be accounted by enterprises into their management costs.

- Collectible debts, after debt remission decisions are issued, must be separately monitored by enterprises on their books for at least 5 years and continue to be subject to debt-recovering measures. Any recovered debts, after subtracting expenses related to the debt recovery, shall be accounted by enterprises into irregular incomes.

III. IMPLEMENTATION PROVISIONS

1. This Circular takes effect after its signing and replaces Circular No. 64-TC/TCDN of September 15, 1997 of the Finance Ministry guiding the regime of setting up and use of reserves for price decrease of goods in stock, bad debts and price decrease of securities at State enterprises and other documents on the setting up and use of reserves, which are contrary to the provisions of this Circular.

2. The setting up of reserves by credit institutions shall comply with the provisions of documents guiding the financial regime applicable to credit institutions.

3. Enterprises shall have to elaborate their own regulations on managing supplies, goods as well as debts in order to minimize business risks. Regarding debts, such a regulation must clearly define responsibilities of each section or each person for managing, monitoring and recovering debts in order to minimize bad debts and determine material liability of such section or person when bad debts arise. Enterprises are strictly prohibited to take advantage of the setting up of reserves to additionally account groundless reserves into their expenditures with a view to lessen their budget remittance obligation. Enterprises which intentionally commit such violations shall be handled as tax evaders

4. Finance agencies of all levels shall have to disseminate the provisions of this Circular, guide and inspect enterprises in the setting up and use of reserves for price decrease of supplies and goods in stock, bad collectible debts and price decrease of securities according to such provisions.

5. Any problems arising in the course of implementation should be promptly reported to the Finance Ministry for study, amendment and supplement.

For the Minister of Finance
Vice Minister
TRAN VAN TA