Income recognition or bad debt provision

If receipt of income is doubtful, is the income recognised and bad debt provided?

Didn't find your answer?

A seemingly basic question, but I need to check my response to a client query.

FRS 102 requires that recognition of income means that it is probable that future economic benefits will flow to the entity.

If loan interest is due to the company, but it is doubtful that it will ever be received, it would appear that the interest should not be recognised in the first place. However, if the income has been recognised, and a trade debt created, then any doubts over recoverability mean that a bad debt provision is created against the debtor.

Is it therefore incorrect to recognise the interest income and immediately create a bad debt provision?

Replies (3)

Please login or register to join the discussion.

By johngroganjga
26th Jun 2017 10:27

Yes - there are two separate questions.

That is - assuming that the only doubt over payment is the debtor's solvency. If there is some doubt, or dispute, over the entitlement to interest per se, that would be a diferent matter.

Thanks (1)
Replying to johngroganjga:
avatar
By jonathanw
26th Jun 2017 10:50

John, thank you for your reply.

The entitlement to the interest is agreed, but it is certain that the borrower (a subsidiary) will never be able to pay the interest.

Thanks (0)
avatar
By paulwakefield1
26th Jun 2017 13:11

Deloitte's GAAP 2017 would appear to support not recognising revenue if it is clear or probable at the time of "sale" that it will never be paid . The analogy they give is, if consideration is unlikely to be received due to exchange controls, then revenue would only be recognised on receipt. A bad debt would be recognised if the revenue has already been recognised.

Thanks (1)