Provision for doubtful debts : non-banks (more accounting influences)

• Author: Michael Rudnicki
• Date: 01 March 2020
• Record Number: btclq_v11_n1_a3
• Published date: 01 March 2020
• Pages: 9-17
• DOI: 10.10520/EJC-1ceb33cf5f

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© SIBER INK

Provision for Doubtful Debts:

NON-BANKS (MORE ACCOUNTING



MICHAEL RUDNICKI

ABSTRACT

A number of references to accounting principles and statements have found

    

most recent section of the Act which has introduced references to accounting



Section 11(j

to credit provisioning. The section provides for a 25% allowance in relation

to credit impairments, and 40% in relation to a loss allowance relating to

impairment that is measured at an amount equal to the lifetime expected

  



            -

mined in relation to the lifetime expected credit loss of debt. The expecta-

tion of credit loss is assessed based on the risk of default occurring over the

expected life of each loan, or collection of loans, and is based on reasonable

and supportable information. If the credit risk has not increased signif‌icantly

since initial recognition, the loss allowance is equal to the 12-month expected

    

     -

ability of default as opposed to information in the past.

Measurement of expected credit losses is established by evaluating a range

of possible outcomes which are weighted and present valued with a time

value of money determination.



11(j

based on the lifetime expected credit loss, which means that the f‌inancial

instrument(s) have signif‌icant credit-risk increase since initial recognition,

40% of the accounting provision is applied for section 11(j) purposes. Subject

to a directive from SARS for credit impaired debt, which may result in an 85%

allowance, the 40% provision is applied. Where signif‌icant credit risk does not

exist in relation to f‌inancial instruments, a 25% allowance is applied.

Introduction

Prior to years of assessment commencing on or after 1 January 2019 the

allowance for doubtful debts was premised on a f‌ixed, arbitrary rate of 25%

applied to a list of debts, which in the opinion of SARS, was considered

doubtful. The rules relating to the allowance are found in section 11(j) of

the Income Tax Act 58 of 1962 (the Act). Although the practice of SARS was

to permit a 25% allowance, the section was subject to objection and appeal.