Saturday, March 29, 2014

Settlement of account receivable via shares / interest in the Company

Let us explore something that is not common but it may have happened in the real business world.

Your audit recorded an account receivable from a particular customer, who is understood to be in financial difficulty. As a result, your audit client had determined that the colleatability of this debt is not uncertain, hence, they had provided for with provision.

After a while, this external customer in financial diffulty situation went through some restructuring, and they had agreed to settle the debt by issuing its own shares to the creditors as a partial settlement plan. As a result, your audit client may hold hold interest in this external customer.

What is the accounting implication to management? Management is required to assess the value of the shares obtained via this arrangement - due to the financial difficulty encountered by this external cutomer, it is probably worth minimal. Nevertheless, it is important to remove the accont receivable and provision for doubtful debt previously provided for - as there is no more such balance.

Instead, the management should record the value of this investment - and this amount should not be higher than the gross account receivable previously recorded, whilst the Company may reverse the provision amount by the value of investment received.

The above scenario is not straightforward and may involve complex discussion. Please feel free to seek clarification from us -

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