Uncollectible Receivables: Write-Downs and Bad-Debt Provision

Every company that sells on credit sooner or later receives bad news: a customer who does not pay. When a receivable becomes doubtful or wholly unrecoverable, ignoring it is not enough: the balance sheet must reflect it. The write-down of receivables and the bad-debt provision (delcredere) are the tools by which the accounts tell the truth about the real value of what the company still has to collect. Ignoring them means inflating both assets and profit.

Why write down receivables

The Code of Obligations imposes the prudence principle: assets cannot be carried at a value higher than what can reasonably be expected to be realised. A receivable from a customer in difficulty is no longer worth its nominal amount. Carrying it on the balance sheet at full value means overstating net assets and, as a result, profit — with consequences both for the true reading of the accounts and for the taxes paid on a partly fictitious profit.

Doubtful receivables and lost receivables

Two situations must be distinguished:

Doubtful receivable: there is a concrete risk of not collecting (customer chronically late, under enforcement, in financial difficulty), but the loss is not yet certain or definitive. Here a write-down is applied.
Lost receivable (definitively uncollectible): the loss is established, for example with a certificate of insufficient assets at the end of fruitless enforcement or through the debtor’s bankruptcy. Here the receivable is definitively written off as a loss on receivables.

The bad-debt provision

The bad-debt provision (delcredere) is a value-adjustment fund that reduces the value of receivables to account for the risk of non-collection. It can be set up in two ways, often combined:

Specific provision: each receivable at risk is assessed case by case and written down by the portion feared to be lost.
Flat-rate provision: a percentage is applied to the whole of trade receivables, to cover the generic risk that a part will not be collected.

In Switzerland the tax authorities allow, on a flat-rate basis, a write-down within established reference percentages — typically lower for receivables from Swiss customers and higher for foreign ones. The exact percentages vary between cantons: it is advisable to check those applicable before setting them. A write-down within those limits is normally accepted for tax purposes; beyond that, it must be justified by a documented specific risk.

The effect on the balance sheet and on VAT

The write-down is a cost that reduces the profit for the year and, correspondingly, lowers the net value of receivables under assets. If the receivable is subsequently collected after all, the write-down is reversed and re-emerges as income.

On the VAT front, anyone who has already paid the tax on an invoice that then remains unpaid can, on the definitive loss of the receivable, correct the VAT declared at the time: the tax follows the fate of the receivable. It is a legitimate recovery, to be documented correctly in the period in which the loss materialises.

Common mistakes

Keeping receivables clearly at risk on the balance sheet at full value, inflating assets and profit.
Writing off a receivable as lost when it is only doubtful, or conversely keeping it doubtful when the loss is by now definitive.
Ignoring the flat-rate reference percentages and ending up with write-downs added back for taxation.
Forgetting the VAT recovery on definitively lost receivables.

In summary

The prudence principle requires receivables to be carried at their realisable, not nominal, value.
Doubtful receivable: write it down; definitively lost receivable: write it off.
The bad-debt provision can be specific, flat-rate or both.
In Switzerland there are flat-rate reference percentages, differing between cantons and between domestic and foreign receivables.
On the definitive loss, the VAT paid on the unpaid invoice can be corrected.

How we help you

We set up for companies the correct valuation of receivables, the bad-debt provision within tax limits and the management of write-offs and VAT recovery, in compliance with the prudence principle of the Code of Obligations. We sort out your receivables.