Collecting bad debt in Agrexport is cooperated between finance and accounting department and correspondent import-export business. There is a vice director which directly takes charge of collecting bad debts.
Collecting bad debt in Agrexport includes contacting customers directly, issuing letter of demanding, making allowance for doubtful debt, write off uncollectible debt as bad debt expense, and taking a lawsuit.
In the first stage, vice director directly contacts customers. The first contact is through telephone to remind customers about overdue debt, find out the reasons of late payment as well as negotiate about payment plan. If it is not useful, more face to face appointment are made to ensure the effectiveness of collection. If this solution does not work, 3 letters of demand are issuing in order.
In the process of collecting, if Agrexport realized that customers had ability to pay debt but need more time, Agrexport will extend the credit term for customers. In some cases, if customer’s account take over credit limit but client firms had the improvement in the speed of consuming goods, Agrexport will continue to sell on credit for customers. This policy not only increases the ability to collect debt because of client’s better performance but also maintains good relationship with clients.
6.2.5.2 Making allowance for doubtful debt
Agrexport based on Circular 228 to give definition of doubtful debt as following:
“Receivables become doubtful debts if satisfying the following conditions:
- Being evidenced by original documents, with debtors' comparison and certification of unpaid debt amounts, including economic contracts, loan agreements, and written records of contract liquidation, debt acknowledgment, debt comparison and other documents.
Amounts with insufficient grounds to be recognized as receivable debts under these regulations must be treated as a loss.
- Having sufficient grounds to be recognized as bad receivable debts, including:
+ Overdue receivable debts stated in economic contracts, loan agreements or other debt acknowledgments.
+ Undue receivable debts owned by indebted economic organizations (companies, private enterprises, cooperatives or credit institutions) which fall bankrupt or are undergoing dissolution procedures, debtors are missing, have absconded, are prosecuted, detained or tried by law enforcement bodies, are serving sentences or have deceased.”
To handle with doubtful debt, Agrexport makes allowance for doubtful debt according to Circular 228, as followed:
+ 30% of the value of a receivable debt which has been overdue for between over 6 months and under one year.
+ 50% of the value of a receivable debt which has been overdue for between 1 year and under 2 years.
+ 70% of the value of a receivable debt which has been overdue for between 2 years and under 3 years.
+ 100% of the value of a receivable debt which has been overdue for 3 years or more.
- For undue receivable debts owned by indebted economic organizations which fall bankrupt or are undergoing dissolution procedures; debtors are missing, have absconded, are prosecuted, detained or tried by law enforcement bodies, or are serving sentences, the enterprise shall estimate the irrecoverable loss for appropriating the provision.
- After appropriating the provision for each bad receivable debt, the enterprise shall sum them up in a detailed list which serves as a basis for accounting them as its management expenses.
6.2.5.3 Writing off uncollectible debt as bad debt expense Agrexport followed Circular 228 to give definition of uncollectible debt:
“Uncollectible receivable debts include debts in the following cases:
- For economic organizations:
+ In case debtors are bankrupt or dissolved: Court decisions on declaration of enterprise bankruptcy under the Bankruptcy Law or competent persons' decisions on dissolution of indebted enterprises are required. In case of self-dissolution, announcement of dissolved units or certification by the agency which has decided on the establishment of these units or organizations is required.
+ In case debtors have terminated their operation and become insolvent: Written certification of the termination of operation and insolvency of enterprises or organizations issued by the agency which has decided on the establishment of enterprises or organizations which have made business registration for these indebted enterprises is required.
- For individuals, any of following documents is required:
+ Death certificates (copies) or local administrations' certification, for debtors who have deceased without leaving inheritance for debt payment.
+ Local administrations' certification, for debtors who are still alive or missing but unable to pay debts.
+ Arrest warrants or certification by law enforcement bodies, for debtors who have absconded, are prosecuted or serving sentences, or local administrations' certification of the insolvency of debtors or their heirs.
To write-off bad debts, Agrexport uses its provisions for bad receivable debts or financial reserves fund to offset the value of actual loss of irrecoverable debts and account the deficit amount as its management expenses.
Receivable debts, after the issuance of handling decisions, must be separately monitored by the enterprise on its accounting book and recorded off-balance-sheet for between 10 and 15 years from the date of handling and continued to be recovered with different measures. Any recovered debt amount shall, after subtracting expenses for the debt recovery, be accounted by the enterprise as other incomes.
6.2.5.4 Bad debts situation in Agrexport
Table 8: Agrexport’s bad debts and account receivable from 2008 to 2011 (Unit: billion VND)
2008 2009
%
increase 2010
%
increase 2011
% increase
Bad debts 2.5 2.6 4.00% 3.5 34.62% 6.5 85.71%
Account
receivable 8.3 8 -3.61% 11.1 38.75% 20.2 81.98%
Bad debts/
Account
receivable 30.12% 32.50% n/a 31.53% n/a 32.18% n/a
(Source: Agrexport’s finance and accounting department) As seen in the above table, in 2009, the amount of bad debt increased slightly by 0.1 billion VND while there was a decrease in account receivable, resulting in the ratio of bad debt to account receivable increase from 30.12% in 2008 to 32.5% in 2009. It can be explained that 2009 was a tough year for Vietnam economy, leading to the bankruptcy of numerous firms. Other firms also faced financial difficulty. Some of Agrexport’s customers were in the same situation, which led to the higher bad debts to account receivable.
With the recovery in 2010, it was obvious that the percentage of increase in bad debts was 4% less than that in account receivables with 38.75%, and thus reducing the
percentage of bad debts over account receivable by 1%. Due to the economic recovery in 2010, many Agrexport’s customers owned better financial health, thus they could pay for their debt.
However, 2011 recorded the highest increase in bad debts and account receivables by 85.71% and 81.98%, respectively in 4 years. Due to the higher rate of increase in bad debts than in account receivable, the ratio of bad debts over account receivable rose slightly with 0.5%. This originated from the difficulties in consuming goods and the high ratio of inventory, resulting that Agrexport’s customers did not have money to pay debts.
6.2.5.5 Legal actions with overdue debt
As stated above, Agrexport’s bad debt documentation is re-examined and analyzed to find out the reasons of arising bad debts by analyzing customers’ recent production activities, its financial situation as well as its customers. If the reason comes from the client firm’s current financial difficulty, Agrexport makes appointments with client firms to negotiate about payment time and condition as well as consider extension to bad debts if possible. In case customers intentionally evade paying debts, Agrexport proceed legal actions to deal with bad debts. Before making decision of taking a lawsuit, there is a meeting in which Agrexport weighs the return of receivable and cost of lawsuit. The typical case is Thuy Anh company.
Thuy Anh company is a company which operates in producing plastic wrapping and packing. It, in the past, was a royal customer of Agrexport. Due to the longtime relationship with Thuy Anh company, in 2004, Agrexport granted it a credit with amount of more than 1 billion VND, with 15% deposit instead of collateral. However, due to its weak production situation in 2003 and 2004, Thuy Anh faced financial difficulties and owned high debts owed to many creditors, including banks and Agrexport. Agrexport realized this situation and soon made allowance for this amount of debt since 2005. In 2007, 100% of the amount was made allowance.
Simultaneously, Agrexport took many actions for Thuy Anh company such as 3 times letters of demand, warning letters, telephones, face-to-face meetings. However, Thuy Anh had not paid yet. After weighing the cost of lawsuit and the amount of collection, Agrexport decided to proceed a lawsuit against Thuy Anh. This lawsuit took place in 2010, and has continued.