Is there difference between when you state you will provide a specific provison and you will make a specific provision of £3200 against a partcular debt?

Is there difference between when you state you...

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Pretty much in the title

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Scalloway Castle
By scalloway
06th Dec 2013 23:47

In my experience

you set a fixed percentage against all debts as a bad debt provision just in case an unspecified debt currently in the balance sheet goes bad. You can also set a specific bad debt provision against a specific debt or debts because you suspect they will go bad. This is done perhaps when a debtor is still trading but is very slow in paying.

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By User deleted
07th Dec 2013 00:13

The reason for ...

... the two types is that a specific provision is an allowable deduction against profit for tax purposes, a general provision is not.

A general provision would be used to give a prudent approach to the profit for management purposes.

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By User deleted
07th Dec 2013 11:48

General and specific

It is possible to make a "general" provision that is allowable. If experIEnce shows that 1 in 10 debts are likely to go bad (and especially if supported by post balance sheet analysis) HMRC can be persuaded to accept a 10% "general" provision. This is because it is a provision against specific debts - you just don't know which ones.

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By Steve Kesby
07th Dec 2013 11:47

Misnomer

The term provision for bad debts is actually a misnomer. A debtor is an asset. A provision is a liability of uncertain timing, and amount and you don't impair an asset by recognising a liability.

The terms specific provision and general provision are even more unhelpful, because it's encouraged faulty thinking on the part of HMRC that the specific provision can be allowed and the general provision can't.

FRS 26 explains how to impair financial assets (like trade debtors). You first impair material items to the extent that their recovery is considered dubious, and then you group your debtors together according to those that have a similar risk profile and perform an expected value calculation.

The expected value calculation is very much like the general provision that has been described. FRS 26 makes the point that BKD has made. It's not that you're calculating a general impairment amount; you are impairing specific debts, which are as yet unidentified individually.

Corporate Tax legislation specifically provides for these "impairment losses" to be deductible. The CT legislation used to be the same as the IT legislation and when it was changed the explanatory notes said that it meant the same thing that it always meant, it was just using modern terminology.

So you were always able to deduct impairment losses, it was only HMRC that said you couldn't. Their manuals do now say that you can deduct an impairment loss calculated under FRS 26 though.

Most entities aren't required to apply FRS 26, but that needn't stop them calculating an impairment loss by the FRS 26 method (which is pretty much the same way that it's always been done!).

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By User deleted
07th Dec 2013 22:07

I think we are ...

... over egging somewhat.

The OP is a student accountant and the answer I gave is the required one to pass his exams. What may happen in practice is not that relevant to him at this time, he can worry about that once he is qualified.

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By Mouse007
08th Dec 2013 01:17

because membership of our secret club must remain

closed until such time as he passes his initiation test, until then

 

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By User deleted
08th Dec 2013 10:17

Alas poor mouse ...
... looks like he has early onset Appzeimers! Symptoms include the posting of puerile and banal comments with monotonous regularity - a kind of i-Tourettes!

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