Receivables

Policy

FIACCT 06-01_14 – FINET – Write-offs and allowances

Effective: July 1, 1998
Revised: December 1, 2019
Reviewed: December 1, 2019

Purpose

This policy explains the policies and procedures that should be followed to account for uncollectible
Receivables in FINET.


Background

There is always a degree of uncertainty about the collectability of Receivables. This uncertainty of collection needs to be reflected as an allowance that reduces the accounts receivable balance. Without
this allowance the State’s assets could be overstated.

Approval of write-offs is to be centralized in the Office of State Debt Collection (OSDC), with the approval of write-offs for $1,000 or more to be coordinated with the Division of Finance. OSDC has contracted with collection vendors for the collection of delinquent Receivables. An account should be written off only after all reasonable attempts are made to collect the Receivable.

Reasonable attempts include agency attempts to collect through invoicing and other appropriate contact
prior to placing the account with OSDC. Unless otherwise determined through communication with the
agency on specific accounts, OSDC will work through a combination of in-house operations and outside collection vendors to collect the Receivable until the conditions in subsections M or N are met.

There are two methods of recording and writing off uncollectible Receivables, as outlined below.


Direct Write-off Method

This method should be used only if Receivables are rarely written off. This method does not properly reflect the accounts receivable balance if write-offs occur with any frequency. No entry is made until a specific account receivable is determined to be uncollectible. Once a Receivable is identified as being uncollectible, a debit entry to revenue and a credit entry to accounts receivable are recorded.

This method assumes that a collectible Receivable resulted from each sale, service, assessment, etc., and that later events proved a certain Receivable to become uncollectible and worthless.


Allowance Method

This method should be used if an agency regularly writes off Receivables or has an average Receivable balance greater than $3,000,000.

An estimate is made for the expected value of uncollectible Receivables. The estimate is recorded with a debit to revenue and a credit to allowance for doubtful accounts. When a specific Receivable is identified as being uncollectible, a debit entry to the allowance for doubtful accounts and a credit entry to accounts receivable is recorded.

There are three different basic methods for analyzing Receivables to determine the proper amount that
should be recorded as an allowance for doubtful accounts. They are as follows:

a – Percentage of Sales/Revenues – Based upon the agency’s past experience with uncollectible Receivables, an analysis is made to determine if there is a stable relationship between prior years’ sales on account and uncollectible Receivables. If such a relationship exists, this percentage of uncollectible Receivables to sales/revenue can be used to estimate the current year’s amount to charge to the allowance for doubtful accounts.

b – Percentage of Outstanding Receivables – Based upon the agency’s past experience with uncollectible Receivables, an analysis is made to determine if there is a stable relationship between prior years’ outstanding balance of accounts receivable and uncollectible Receivables. If such a relationship exists, the percentage of uncollectible Receivables to outstanding accounts receivable can be used to estimate the proper balance for the allowance for doubtful accounts.

c – Aging of Receivables – Based upon the agency’s past experience with uncollectible Receivables, an analysis is made to determine if there is a stable relationship between the age of Receivables and those that became uncollectible from each aged group. If such a relationship exists, these percentages of uncollectible Receivables to aged Receivables can be used to estimate the proper balance for the allowance for doubtful accounts.

If there is not a stable relationship of uncollectible Receivables to any of the items listed above, other
reasonable approaches might be desirable for an agency using the allowance method. Any of the above, or other reasonable methods, are acceptable as long as the method is consistently applied. The Division of Finance recommends that state agencies evaluate their estimates on a quarterly basis and make any
necessary adjustments. The Division of Finance requires that state agencies review, and adjust if necessary, their allowances at least once a year.


Policy

A. All write-offs shall first be approved by the agency according to agency policy.

B. Agencies shall analyze Receivables annually to determine the most appropriate method for accounting for uncollectible Receivables.

C. Agencies with Receivables greater than $3,000,000 will establish a proper allowance for doubtful accounts. Agencies will consult with the Division of Finance to establish a proper allowance.

D. Agencies are strongly encouraged to use the allowance method for accounting for uncollectible
Receivables when the agency regularly writes off Receivables.

E. An allowance for doubtful accounts must be reviewed at the end of each fiscal year to determine if
the amount is still appropriate. Quarterly review and adjustment is strongly encouraged so that information in FINET is current during the year.

F. The Director of the Division of Finance will approve the write-off of any Receivable that is $1,000 or
more, except where different approval procedures for write-off are specifically addressed by state statute.

G. Unless exempted by OSDC or where different approval procedures for write-off are specifically
addressed by state statute, OSDC will approve the write-off of any Receivable that is $25 or more.

H. Unless exempted by OSDC, OSDC shall have the opportunity to pursue collection on a Receivable of
$5.00 or more until conditions outlined in subsections M and N are met.

I. Bad debt expense will not be used to record uncollectible Receivables. Instead, the original revenue will be reduced.

J. Agencies will not process a Credit Memo (RM) document to write off Receivables in FINET. Agencies will process a Write-Off (WO) document referencing the original RE document.

K. Agencies shall work with OSDC and the Division of Finance to accurately account for uncollectible Receivables as outlined in this policy.

L. If payment is received in a subsequent fiscal year after a Receivable is written off, the payment will be recorded as revenue in the current fiscal year.

M. A specific Receivable shall automatically be considered uncollectible if one or more of the following
conditions are met:
1. The Receivable has been discharged in bankruptcy. A copy of the discharge notice from the bankruptcy court should be filed with the written-off account.
2. The debtor has died without sufficient assets to pay the State. A copy of the death certificate and
a statement that claims no estate has been opened or the estate’s assets are insufficient to pay the claim of the State should be filed with the written-off account.
3. The debtor is a corporation that has been dissolved and has no assets to pay the State. Documentation from the Division of Corporations should be filed with the written-off account.
4. The Receivable has passed the statute of limitations assigned for its collection.

N. If the criteria in item M above do not apply, a specific Receivable is considered uncollectible and shall be written off when the following conditions are met:
1. It is probable (more than 50 percent chance) that the Receivable is uncollectible,
2. The account has been placed with OSDC’s collection vendor (unless an agency has a written exemption from write-off by OSDC), and
3. The costs of any future collection efforts exceed the amount of the Receivable.
4. A settlement is negotiated with a debtor and the remaining receivable should be removed.


Procedures – Direct Write-Off Method

Responsibility

Agency









OSDC




Division of Finance



OSDC

Action

  1. Send all receivables over 61 days past due to OSDC. Unless exempted. Forward the complete Receivable file to OSDC, including the RE number and the Social Security Number or Tax Identification Number, if known.
  2. Acquire agency write-off approval according to agency and
    Finance/OSDC policy. Finance requires a list of WO documents. The list must contain a total of the approved amount. The list will be in writing and must include an approval (signature and date) from the agency Commissioner or Executive Director or designee, and the agency Director of Finance or designee.
  3. Before writing off a Receivable that is $5.00 or more, notify OSDC that the Receivable has been determined to be uncollectible and approved for write-off by the agency. This may be done by creating a WO document in FINET using the same reference number as the RE.

    Approve the write off of any Receivable that is $1,000 or more, unless different approval procedures are specifically addressed by law.

  4. After obtaining all necessary approvals, write off the Receivable by approving the Write-Off (WO) document in FINET. This will allow OSDC to accurately report write-offs to the Legislature.
  5. Retain the Written-off account in the FINDER file.
  6. Upon completion of all write off procedures, remove the written-off REs from OSDC’s active collection file.

Procedures – Allowance Method

Responsibility

Action

Agency



















OSDC


Division of Finance

  1. Establish an estimate for allowance for doubtful accounts by processing
    an ITA.
     On the Seller side enter the fund where the Receivables are
    recorded and a balance sheet account for Allowance for Bad Debt. Contact the Revenue Accountant at the Division of Finance to have a specific allowance account set up for your specific Receivables.
     On the Buyer side enter the same coding block, including the revenue source, which was used to record the Receivables. Let both sides of the ITA default to Increase.

    The allowance must be reviewed at the end of the fiscal year to
    determine if the amount is still appropriate. Process an ITA to update the allowance amount if necessary. The Division of Finance recommends that agencies review and adjust the allowances quarterly so that the information in FINET is current during the year.
  2. To write off a Receivable, follow the same procedures detailed in the Direct Write-Off Method section of this policy except that the accounting line of the WO must be coded to the appropriate fund and allowance balance sheet account. OSDC

    Follow the same procedures detailed in the Direct Write-Off Method.

    Follow the same procedures detailed in the Direct Write-Off Method.

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