Provision for doubtful debts
Theory:
- Receivables are adjusted by provisions subject to probability of collection,
- The principle of prudent valuation requires updates of asset valuation => update of asset value (IAS 2 par.28, 33)
- provisions are recognised to debtors in liquidation, bankrupt debtors, those that question the debt, overdue and non-overdue when the probability of non-collection is material (IAS 39, par.58, 59)
Practice - example of errors:
- Most often debtors are overvalued
- Non-overdue debtors are not provided for although some of them may become doubtful in the future
- provision estimates are unrealistic, not related to the actual values of the written down balances.
