IMPAIRMENT OF TRADE RECEIVABLES IN THE FINANCIAL STATEMENTS UNDER POLISH BALANCE SHEET LAW Anna Dyhdalewicz INTRODUCTION Impairment of assets is an issue that increasingly determines the rules for the preparation of the financial statements. Updating write-downs on impairment are a key element related to the balance valuation of assets, including trade receivables. The trade receivables of a company result from defer payment for products, goods and materials delivered to the recipient. It is one of the most important components of the company financial resources. The purpose of this article is to present the positions associated with the sale of the deferred payment in the annual financial statements and to explain the principles of the recognition of impairment charges for supplies and services according to the Polish balance sheet law. Problems of estimating and accounting for impairment for trade receivables is shown on the example of Polish capital group listed on the stock Exchange in Warsaw. Reaching the objectives required application of a descriptive method and case study. 1 PRESENTATION OF TRADE AND SERVICE RECEIVABLES IN THE FINANCIAL STATEMENTS The financial statements of general purpose are the main sources of financial information in a company. Individual elements of the statements present the structure of assets, liabilities, income, expenses, financial results and communicate the cash flow. Through selected and consistently applied accounting policy the company affects the values presented in the financial statements. Trade and service receivables compose an asset in the balance sheet, are directly related to revenues, expenses and financial results as well as cash flow. Simultaneously they affect determination of tax burden from income tax and VAT of almost every enterprise. Table 1 shows the reflection of trade and service receivables in the different parts of the financial statements. Tab. 1: Chain of trade and service receivables reflected in the financial statements Balance sheet (report on the financial situation) Recognized in the assets receivables at nominal value VAT Sales of products, goods and materials with deferred payment inclusive. Recognized in the liabilities: (VAT invoice sent to the liabilities of VAT due, contractor). liabilities of income tax (tax net sales according to the accrual Valuation of receivables on the balance sheet date. Assets of deferred income tax. basis). Receivables are measured at the amount due, with the precautionary principle. The amount to be paid is the principal due amount plus accrued interest on late payment, accrued contractual penalties, the court awarded proceeding costs and recovery proceeding costs. The fixed amount is reduced by the update write-downs of receivables. In the case of an update write-down made in the full amount of receivables, the carrying value of receivables is zero. The receivables in foreign currency are adjusted for exchange rate. Indicated in the amount of expected future income tax deduction to be paid by the entity in the future, in regard to the deductible temporary differences between the lower value of the carrying amount and the higher value of their tax. Profit and loss statement (the statement of total income for the period) Sales (VAT invoice) of products, goods and materials with deferred payment. Due or received interest for Registration of net revenue from sales of products, goods and materials with the accrual basis of accounting. Increase in financial income.
delay in payment of debts. Exchange differences arising from the valuation of receivables in foreign currencies (realized due to repayment of debts, unrealized differences arising from the valuation on the balance sheet date). Write-off the expired and cancelled receivables or bad debts. Paid court costs, enforcement, receivables claims-related costs. Making allowance for impairment of receivables taking into account the probability of their collection. Recognition of so-called allowance for bad debts which refers to the recovery of VAT paid due to the sales invoice that has not been settled by the contractor. Income tax. Change in accounts receivable (changes in working capital). Introduction to the financial statements. Additional information and explanations Increase in financial income (foreign exchange gains) or financial costs (foreign exchange losses). In profit and loss the surplus foreign exchange gains over losses are recognized in financial income while the surplus of foreign exchange losses over gains as financial cost. Increase in other operating costs. Increase in other operating costs. Increase in other operating costs (in the case of main receivables) and financial costs (refers to updating contractor accrued interest). Increase in other operating income by the amount of VAT constituting an adjustment of VAT due. Current tax: sales tax charged on an accrual basis, no possibility to deduct from the tax base expired receivables and bad debts which the company can not substantiate. Taxation on court awarded and received amounts (in accordance with the cash principle), writs of execution, and interest on debt. No other operating income taxation for bad debt relief. Deferred income tax: recognition of deductible temporary differences associated with proving probable the update writedowns for income tax purposes in the future fiscal periods. Cash flow (cash flow statement) In case of applying: indirect method: correction of cash flow from operating activities; increase in receivables correction of net income on the minus (cash outflow), decrease of receivables correction of profit on the plus (cash inflow); direct method: correction of sales revenue by the increase in receivables. Additional information Description of the adopted accounting rules including the methods of valuation with regard to the principles of making write-downs. Information on: uncertainty existence as to the receivables from goods delivery and services net, gross, update write-downs of receivables with an indication of the state at the beginning of the financial year, an increase, use of cancelation and the state at the end of the financial year. Information on main points differing gross financial result (accounting) from the tax base on the income tax such as expired receivables that are not deductible for tax purposes and result in an increase in the tax base. Information on uncertainty existence as to the possibility of continuing operations such as breach of contract or limiting cooperation with main clients could adversely affect revenues and financial results, financial difficulties of contractors could cause receivables collection risk, cash flow worsening. Source: own study
Balance sheet law regulations require companies to assess whether there is any indication that the impairment might have occurred of future economic benefits included in the assets. In regard to trace and service receivables it is necessary to take into account the negative consequences associated with the loss of all or a part of receivables from unreliable debtors. 2 WRITE-DOWNS UPDATING TRADE RECEIVABLES VALUE UNDER POLISH BALANCE SHEET LAW Since 1995 in Poland the basic legal act regulating the accounting, including preparation of the financial statement, is the Act on Accounting (AA). Under Art.10 par 3 AA matters not covered by its provisions, adopting principles (policy) of accounting, the subjects can apply the national accounting standards determined by the National Accounting Standards Committee. If there is no adequate national standard the entities may apply solutions determined in the International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS). The provision does not apply to entities that are required to prepare the financial statements in accordance with IAS/IFRS by the Regulation of the European Parliament and of the European Union Council on 19 July 2002. These entities have to apply the AA regulations and the implementing rules issued on its basis thereof not covered by IAS/IFRS [8]. The issues of write-downs updating the value of receivables are governed by Articles 35b and 35c AA, National Accounting Standard No 4 Impairment of assets (NAS 4) [3] and International Accounting Standard No 36 Impairment of assets (IAS 36) [4]. The entities that prepare the annual financial statements in accordance with IAS/IFRS are required to apply in this area IAS 36, followed by national legislation. The Act on Accounting bases the impairment of assets on the likelihood of a situation that the assets will not bring in the future a substantial part or all of the anticipated economic benefits. In the light of both national and international standards the impairment depends on the relation between the asset s carrying amount and its recoverable amount. NAS 4 and IAS 36 do not define in any particular way, separate rules for valuation of trade receivables and related impairment updating write-downs. In contrast to IAS 36 and NAS 4, the Accounting Act has identified a list of receivables with a high risk of default, for which there is an obligation of making update allowance for, on at least the balance sheet date. Determining the specific and objective rules is up to the management of each entity [7]. According to the AA the following receivables should be updated [2, 8]: 1) from debtors in liquidation or bankruptcy; 2) receivables from debtors in case of dismissal of the bankruptcy, if the property is not sufficient to cover the costs of insolvency proceedings; 3) receivables disputed by the debtors and payments of which the debtor is in arrears and by assessing the debtor s financial position the repayment of the contractual amounts is not likely; 4) receivables equivalent to the amounts increasing the receivables, in relation to which the updating impairment has been already done; 5) expired or unexpired claims of a significant degree of probability of default, in cases justified by the business type or the structure of recipients. The amount of the write-down shall be in full up to the amount not covered by the guarantee or other security or reliable estimated amounts in full if it is justified by the business type or the structure of recipients that indicates high probability of default [1]. The value of write-downs made is burdens the financial results under other operating costs or financial costs depending on the type of receivables. At the balance sheet date, expired, cancelled or deemed to be uncollectible receivables are deducted from the accounts into the costs or such receivables reduce the amount of the update write-downs previously made. It should be noted that the revaluation of receivables is related to the compliance with the guiding principles of accounting, such as prudent valuation, accrual and matching of revenues and expenses [5]. 3 IMPAIRMENT LOSSES ON RECEIVABLES CASE STUDY The methodology of determining impairment losses on trade receivables is presented on the example of Polish Telecommunication Group. The annual consolidated financial statement for the year 2011 served as a source of information. The Group, a leading provider of telecommunication services is composed of Polish Telecom and its subsidiaries. The Group prepares its consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. The accounting policy applied by the Group is to ensure that the financial statements properly, clearly and fairly present the financial position of the Group, the results of its operations and its cash flows [6].
In the introduction to the financial statement the company announces that the receivables, including trade receivables among other, are recognized initially at their fair value plus directly attributable transaction costs and are valued at amortized cost with the effective repayment rate. Short-term receivables with no stated interest rate, which include charges for supplies and services, are valued at the original invoice amount, if the effect of discounting will not significantly influence the obtained result. At each balance sheet date the Group assesses whether there is any objective evidence indicating that the value of the receivables are impaired. The occurrences of such conditions result in determining the recoverable amount of the asset. If it s less than the carrying amount, an update write-down is made of impairment, which is recognized in the profit and loss account. The impairment is recognized for the difference between the recoverable amount and the carrying amount of the trade receivables. In order to determine the recoverable amount the Group adopted two methods of estimating losses related to the specific contractors. Receivables with the similar commercial risk are tested for impairment on collective amounts (so called global write-downs are made). Estimating the expected credit risk the company uses historical data to determine the degree of probability of payment by the customer group. Receivables that are individually significant and heterogeneous are considered from the point of view the major financial difficulties of the debtor, or the probability of bankruptcy, its financial reorganization. Impairment losses in this case are made on the basis of the risk of default assigned to a particular debtor. Update write-downs are recognized in a separate account, which reduces the value of receivables recognized in the balance sheet. These write-downs are used to write down bad debts. The Group notes show the value of net trade receivables and receivables in respect of VAT on the last day of the current and previous financial year as is presented in Table 2. Tab. 2: The value of trade receivables in the additional information explanatory note 14 (figures in million PLN) Assets as at 31.12.2011 as at 31.12.2010 Trade receivables net 1.506 1.637 Receivables in respect of VAT 136 105 Source: The annual consolidated financial statement of Polish Telecommunication Group for the year 2011 [6]. Then the information is provided regarding update write-downs of trade receivables for the current and previous financial year (see Table 3) Tab. 3: Update write-downs of trade receivables for the 12-month periods ended 31 December 2011 and 20101 (figures in millions PLN) Specification 12 months until 31 Dec. 2011 12 months until 31 Dec. 2010 Initial balance 339 293 Write-downs made 129 107 Sold or written off trade receivables (167) (61) recognized in update write-downs and other changes Closing balance 301 339 Source: The annual consolidated financial statement of Polish Telecommunication Group for the year 2011 [6]. In the notes of financial revenues and costs interest for late payment of commercial debts were isolated (in 2011 it was the amount of 29 million PLN, in 2010 36 million PLN). Other operating costs include total impairment and costs of the sold trade and other receivables, net. The other operating revenue include incomes of sales and recovery the duties. The following table reflects the division of net trade receivables depending on the customer groups and term structure of overdue receivables. The Group publishes information in separate tables for the current and previous financial year. Tab. 4: The carrying amount of trade receivables (recoverable value) according to the methods adopted for testing the impairment and the age structure of overdue receivables as at 31 December 2011 Expired Specification The Not written-down and Less than 180 between More than
Total trade receivables tested for impairment Individual trade receivables tested for carrying amount unexpired days 180 and 360 days 360 days 1.464 951 449 52 12 42 - - - - impairment Total trade receivables, net 1.506 - - - - Source: The annual consolidated financial statement of Polish Telecommunication Group for the year 2011 [6]. Based on Table 4 we can only presume the time intervals used by the Group to estimate the updating write-downs of expired receivables. The presented data do not result in applied percentages representing the impairment within the given intervals. From the perspective of financial statement users the key information about credit risk is included in a report on the activities, called also the board report. The board assumes supporting the Group development and simultaneous minimizing financial risk through actions to ensure that customers and contractors are able to pay the amounts owed the Group. The Group announces that the Special Credit Committee assesses the credit risk of customers, monitors the business and financial situation of clients, and manages receivables and bad debts. In the company there is no significant concentration of credit risk due to the large and diverse base of individual and business clients [6]. CONCLUSION With regard to the issues discussed above the following conclusions can be drawn: 1. Trade receivables compose a category associated with the sale of products, goods and materials with deferred payment. Records of business transactions related to the clearing with customers influences different items shown in the various elements of the financial statements, and in particular in the balance sheet and profit and loss account. 2. The methodology adopted to determine the impairment of trade receivables should take into account the biding balance sheet law. It is necessary to select the specific rules by which the objective assessment of the write-downs is possible depending on the clients specifics. 3. Discussion of the rules adopted by the entity in determining the update write-downs should be included in the additional information. The accepted principles should be applied in the continuous manner, which ensures comparability of financial statements for the years and facilitates concluding on the financial condition of the company. Information disclosed in the supplementary notes allows stakeholders to understand the impact of different operations on the business results and the financial position of the company. 4. Valuation of trade receivables and their presentation in the annual financial statements are the result of actions taken in receivables management. In the above empirical example a positive evaluation should be granted to the relation of receivables management and the financial reporting system. The accounting policy records are based on IAS 36. In the introduction to the financial report the information user is informed about the adopted methods of update write-downs related to the impairment of trade receivables. The measurement takes into account the identification of impairment indicators, determining the recoverable amount, determining and settling the amount of write-downs in the income statement, monitoring the circumstances justifying the use, cessation or potential reversal of the write-downs updating the value. 5. According to the author, it would be reasonable to supplement the verbal description and quantitative data with the indicator of the share of write-downs updating receivables, increased by expired, cancelled and uncollectable receivables in total trade receivables. Such an indicator would allow to determine easily the effectiveness of actions taken or would signal abnormalities in the management of this element of property.
BIBLIOGRAPHY [1] Gierusz J., Koszty i przychody w świetle nadrzędnych zasad rachunkowości, ODDK, Gdańsk 2005, ISBN 83-7426-161-7. [2] Gmytrasiewicz M., Karmańska A., Rachunkowość finansowa, Wydanie II, Difin 2006, ISBN 83-7251-614-6. [3] Krajowy Standard Rachunkowości nr 4 Utrata wartości aktywów, Dz. Urz. Ministra Finansów z 2007 r. nr 8 poz. 46. [4] Międzynarodowe Standardy Sprawozdawczości Finansowej, Część A. SKwP Zarząd Główny w Warszawie, IFRS Fundation, Warszawa 2011. ISBN 978-1-907877-01-8. [5] Różańska E., Rozrachunki i obrót wierzytelnościami, w: Rachunkowość finansowa dla profesjonalistów, red. nauk. Gabrusewicz W., SKwP Zarząd Główny ICZK, Warszawa 2011, ISBN 978-837228-280-4. [6] Skonsolidowane sprawozdanie finansowe za rok zakończony 31 grudnia 2011 Grupy Kapitałowej Telekomunikacja Polska. [7] Świderska M., Należności, w: Sprawozdanie finansowe bez tajemnic, red. nauk. Świderska G. K., Wiecław W., Wydanie drugie, Difin, Warszawa 2006, ISBN 83-7251-592-1. [8] Ustawa z dnia 29 września 1994 r. o rachunkowości, Dz. U. Nr 121, poz. 591 z późn. zm. Author s address: Anna Dyhdalewicz, Ph.D., Bialystok University of Technology, Faculty of Management, Department of Management and Finance, dyhdalewicz@wp.pl
IMPAIRMENT OF TRADE RECEIVABLES IN THE FINANCIAL STATEMENTS UNDER POLISH BALANCE SHEET LAW Abstract The purpose of this article is to present the positions associated with the sale of the deferred payment in the annual financial statements and to explain the principles of the recognition of impairment charges for supplies and services according to the Polish balance sheet law. Problems of estimating and accounting for impairment for trade receivables is shown on the example of Polish capital group listed on the stock Exchange in Warsaw. Reaching the objectives required application of a descriptive method and case study. Records of business transactions related to the clearing with customers influences different items shown in the various elements of the financial statements, and in particular in the balance sheet and profit and loss account. The methodology adopted to determine the impairment of trade receivables should take into account the biding balance sheet law. It is necessary to select the specific rules by which the objective assessment of the write-downs is possible depending on the clients specifics. In the above empirical example a positive evaluation should be granted to the relation of receivables management and the financial reporting system. Key words trade receivables, update write-downs of receivables, accounting policy, financial statement JEL Classification M41