Accounts receivable: How is the accounting management for bankrupt entities?

The accounting treatment of accounts receivable incorporates different principles, including impairment indicators. These give indications that an item should be impaired or not. Among the indicators is that it is probable that the debtor will go bankrupt.

We will now answer the following question: What accounting treatment should be applied to the accounts receivable of another company that has filed for bankruptcy?

In order to answer the question, it is necessary to specify that the state of bankruptcy responds to the legal situation in which an entity cannot meet its obligations with third parties, since its resources and income are not sufficient to cover its liabilities and it also considers that it cannot continue with the execution of its activities in the foreseeable future, in short, the entity does not comply with the going concern hypothesis or is in insolvency.

Now, assuming that entity A is the one that has pending collection of the account receivable and that entity B is the one that has declared bankruptcy or insolvency; B must expose to the users its bankruptcy situation and advance the relevant legal process and A, for its part, must make an analysis of the situation. One possible conclusion would be that even if there is a legal process, the value to be recovered from the account receivable would be minimal, since the judge may determine that the assets of entity B be divided among all the creditors, thus generating a minimum collection for each one.

This type of analysis in which entity A determines that it cannot collect the outstanding receivable from entity B is called an indication of impairment (see guidelines set out in paragraph 11.22 (d) of the SME Standard). Upon confirmation of these indications, the entity should proceed to recognize the impairment of such portfolio, derecognizing the receivable and recognizing the loss in profit or loss.

Source: Actualícese