1. Introduction

This document describes the standard operating procedure for the Management of Sleeping Debts, Bad Debts and write-off.

"A provision for impairment of trade receivables must be established when there is an objective evidence that the group will not be able to collect all amounts due. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired".

Source : International Financial Reporting Standards.

The practice of creating general provisions is on the decline after revisions in the International Financial Reporting Standards (IFRS). Specifically, IAS 39 prohibits creation of general provisions on the basis of past experience due to the subjectivity involved in creating such an estimate.

2. Process Overview

The following graph explains the process in case of debts unpaid for other reasons than the insolvency of the debtor : old debts remaining abnormally unpaid 

They are called "Sleeping debt" in this document. 

Step 1: Invoices are created by the customer service.

Step 2: As a standard, assignment will be with recourse.

Step 3: Credit Management, following rules described in SOP, will give instructions to AR department about write-down (concerned invoices and amount).

Step 4: After miscellaneous actions, customer has paid. The account has to be cleared.

Step 5: As customer account is cleared, the write-down has to be cancelled.

The following graph explains the process in case of bad debt :

Step 1: Invoices are created by the customer service.

Step 2: As a standard, assignment will be with recourse.

Step 3: Credit Management, following rules described in SOP, will give instructions to AR department about write-down (invoices concerned and amount) and transfer to bad debt account.

Step 4 (optional): After miscellaneous actions, the customer, a legal representative of customer or credit insurance has paid.

Step 5: (optional) : As a payment has been done, a part of the write-down has to be cancelled. Once more, Credit Management gives instructions to AR department.

Step 6 : The bad debt can definitively not be paid. It is transferred to losses and write-down is cancelled.

3. Detailed Description

This section describes the process in detail per sub-process : sleeping debt and doubtful customers

3.1 Sleeping debt

3.1.1 Definition

A sleeping debt is a debt unpaid for reasons other than the insolvency of the debtor:

• either an unsettled dispute related to the principle or nature of the debt
• or for economic or political reasons which compromise the collection of the debt.
• or due to old debts remaining abnormally unpaid after several months.

3.1.2 Calculation

In this case, write-down are recorded at the following rates

The write-down is entered for the non-insured portion of the debt. 

Write-down are only made on the net value (invoice without VAT) for invoices above 1000 €.

3.1.3 Description

The Credit Manager uses a BW query on a quarterly basis in order to determine write-down to be registered.

The Credit Manager informs the accounting department about the amount of write-down to be post.

The affiliate must assume this write-down, even if the receivables have been assigned to Nafta or CICC.

The posting can be registered either via books of CICC and transferred to the invoicing company or via direct write down in the books of the invoicing company : please refer to RtoR workshop.

The instructions to the AR teams have to be sent quarterly, before the 25th of the last month of the quarter.

On the same way, once CICC or Nafta has received the payment, the customer account must be cleared and the write-down cancelled (via CM instructions).

Receivables can be cleared via credit notes in worst cases, if the debt cannot be justified anymore to the debtor.

3.1.4 Developments needs identified

A query from BW is needed quarterly to identify debts above 1000€ that must be written-down :

• overdue over 3 months for clients with rating 4 and 5.
• overdue over 6 months for clients with rating 1, 2 and 3.

This query must be sent automatically by e-mail to each Credit Manager on their portfolio each 15^th of the last month of the quarter (Ex: March 15th) 

Model

3.2 Bad debt

3.2.1 Definition

A customer account is considered doubtful if there is a risk that part or all of the debt may not be recovered due to the debtor's financial difficulties: bankruptcy procedure, legal receivership, disaster situation, or information from a local agent that customer is not able to pay Solvay anymore.

3.2.2 Description

a. Activities

The CM informs the accounting department of any new doubtful debts on a monthly basis.

All doubtful debts must be accounted under "doubtful accounts".

Doubtful debts are removed from overdue accounts but remain in the account receivables balance. They are neither taken into account in DSO calculation nor overdue rate.

The CM must also inform the account receivables department of the amount of the write-down related to the dkseoubtful debt. The calculation is detailed in part b).

The affiliate must assume this write-down, even if the receivables have been assigned to Nafta or CICC.

The posting is registered via CICC books and mirroring to the affiliate books.

The Credit Manager has to verify whether the doubtful customer involved is a Solvay supplier in order to avoid payment to be made in its favor. In this case, the Credit Manager has to inform the Account Payables teams.

The Credit Manager has also to verify whether the customer is a Solvay agent or an agent earning commissions for sales to the doubtful customer involved, in order to avoid payment to be made in its favor.

It is not possible to modify the status of only a part of the receivables of a doubtful customer account into doubtful. All the receivables (and other open items) of a doubtful customer are to be converted into a doubtful status.

Exception:

In some countries, customers who are bankrupt or in a comparable procedure, can continue their activities under the control of the Insolvency Administrator. These customers will keep their VAT code and then their customer number account in SAP, with the consequence that the account will contain old receivables that are subject to the insolvency procedure and new receivables that are not in this procedure.

b. Calculation of the write-down

For uninsured debts a write-down is entered for the total amount of the net value.

For insured debts, a write-down is entered for the non-covered portion.

Specific case of payment plan :

The same rules as for the sleeping debt have to be followed :

The write-down is also entered for the non-insured portion of the debt.

c. Transferring debts to losses

A debt may be considered irrecoverable once the usual methods (notice to pay, summons, ruling, insolvency certificate, etc.) have been exhausted.

If compensation has been received for an insured debt, only the non-insured portion is considered irrecoverable.

VAT recovery : each country handles in a different way taking into account local fiscal policy. CM has to work with accounting department to know local rules for VAT recovery.

Only the Credit Manager is authorized to ask the accounting department to transfer a debt to a loss. The business controller must first be notified in writing and must confirm the request by e-mail. The transfer to a loss is entered once this confirmation is received.

3.2.3 Roles and responsibilities

a. Credit Manager

• Decisions regarding the conversion of receivables into a doubtful status
• Instructions to the Account Receivables (AR) teams, not only when a doubtful is identified but also when a payment concerning a doubtful account is made (insurance, other…) : keep the payment on the doubtful account but apart, without any clearance. The goal is to keep the history clear.
• According to the law and rules of the country involved, the CM has to give the instructions to local accounting Team and coordinate actions for Solvay to recover VAT.
• Inform business controller
• Work with GBU legal department. In particular, CM is responsible to make the necessary legal formalities (notification to the administrator of the insolvency …). Legal Department will be a high support to know what to do depending on the situation.
• Inform Credit Insurance (if client insured)
• Check if doubtful receivables have been written down

b. Account Receivables Team

• Posting according to the Credit Managers' instructions: transfer to doubtful account and register the write-down taking into account assignment of receivable.
• Posting VAT refund if needed.

3.3 Archiving

When a new bad debt is recorded, a paper file or electronic file available on a shared Solvay web site must be set up with the following document :

• Official document describing the legal procedure on the client (RJ, LJ, "procedure de sauvegarde"...)
• Copy of judgments obtained from the administrator, the client representative, the Commercial Court
• If the claim was reported to the credit insurer: insurance claim with request for intervention, the promise of compensation, a copy of the compensation received (check, transfer), contact with Account receivables department related to write down and transfer to doubtful account, and other communications with credit insurer.
• When a litigation procedure has been initiated: a copy of the notice, correspondence
• Copies of invoices constituting the doubtful
• Correspondence: statement of claim to the Administrator
• History of the claim: commercial litigation, emails

3.4 Reports

A report including Bad debt performance and write-down is developed by the workshop "KPI and Reporting".

Special report requested by the Audit : all write down >or= to 250 K€ should be justified and commented in a quarterly report.

More globally, a report on all bad debt of each portfolio will be sent to each CM. CM has to report the last action done on each doubtful client. The objective is to maintain an effective follow-up.