Author: Uliana Luchkevych, lawyer at F&P
Managing accounts payable is a key element of the financial stability of any enterprise. For effective accounting and risk minimization, it is important to understand the criteria for recognizing debt as uncollectible.
A client approached the specialists at FEDORYSHYN&PARTNERS with a request to provide a legal assessment of the possibility of classifying an advance received from a counterparty as a bad debt, considering that more than 3 years have passed since the funds were received and any contact with the counterparty has been lost.
According to paragraph 5 of P(S)BO 11 “Liabilities”, a liability is recognized if its value can be reliably determined and there is a probability of a decrease in future economic benefits due to its settlement. If, as of the balance sheet date, a previously recognized liability is not to be settled, its amount is included in the income of the reporting period.
Thus, in the event that circumstances arise on the balance sheet date indicating that a previously recognized liability is not to be settled, the corresponding amounts should be recognized as income for the relevant reporting period.
Therefore, the key question that arises in this case is the possibility of classifying the received advance payment as bad debt and, accordingly, recognizing such funds as income.
To determine whether the obligation is subject to repayment, it is necessary to refer to the legislative interpretation of the concept of bad debt, which is contained in subparagraph 14.1.11 of paragraph 14.1 of Article 14 of the Tax Code of Ukraine. In particular, according to the specified norm, a debt is considered bad if the statute of limitations has expired.
At first glance, it seems that the advance received by the client can be classified as bad debt, as more than 3 years have passed since it was transferred. However, such a conclusion would be premature.
Due to the implementation of quarantine in Ukraine, and subsequently, martial law, points 12 and 19 were added to the Final and Transitional Provisions of the Civil Code of Ukraine, which provide for the suspension of the statute of limitations.
Thus, if as of March 12, 2020 (the date the quarantine was introduced), the statute of limitations for the return of the advance payment had not expired, the counterparty has the right to go to court to recover the paid funds, and therefore classifying such funds as bad debt is premature.
It is worth noting that the contract concluded by the client with the counterparty provided for the application of Ukrainian legislation to its provisions, which, as we have already mentioned, effectively suspended the statute of limitations during the period of martial law.
At the same time, in the event that the contract concluded with the counterparty stipulates the application of another substantive law to the relations, under which the statute of limitations has expired, the payment received from the counterparty may be classified as bad debt.
It should be noted that the expiration of the statute of limitations for debt recovery is not the only reason for classifying a debt as uncollectible. In case you have doubts about the possibility of classifying the debt as uncollectible, the specialists at FEDORYSHYN&PARTNERS will offer a detailed analysis of the relationships that have arisen with the counterparty and provide a detailed roadmap for your further actions.
