Bad debts and Provisioning Questions

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In this blog we answer some of the common questions we are often asked with regard to loan provisioning.

Are FRS 102 and PRA rules on Provisioning compatible?

Each set of rules should not exclude compliance with the other set of rules. It is important to comply with both sets of rules for your annual accounts to be compliant and to meet PRA requirements.

Does FRS 102 stop you pursuing debts written off?

We have been asked on a number of occasions whether writing off a loan under FRS 102 prevents you from pursuing the debt. This misconception is because the treatment of writing off debts under FRS 102 depends on whether you can pursue the debt. Whether you can pursue a loan depends on your legal rights. The accounting treatment does not have an effect on the ability to pursue the loan. At the end of the day the accounting treatment is just a bookkeeping entry.  Your ability to pursue the debt is a legal question.

Does loan attachment rules impact provisioning?

The PRA rules for provisioning are based on your net exposure after attached shares. Therefore if your loan attachment does not include all shares then your provision calculation should not include all shares.

Should we include accrued interest in our accounts?

The bad debt provisioning rules as set out by the PRA require accrued interest to be provided. If you dont include accrued interest in your assets then you are providing for an asset you have not included. Accrued interest also is part of the value of a loan under FRS 102 and should be included to comply with the standard.

What are the PRA rules regarding rescheduling a loan?

The rules are contained within section 3.12 of the PRA rulebook. This states that provisions on a loan should not be removed after a loan is rescheduled, where the member has not kept to the new rescheduled payments for at least 6 months. Please see the PRA rulebook for more details.

Any tips on recovery of arrears?

Unfortunately, there is no magic wand. From our internal audit work the main piece of advice is quick communication. Arrears cases where members are not followed up quickly, often become bad debts. In addition, we would advise following up with debt collectors regarding the position with the debts that have been passed to them. This is in order to ensure they are not forgotten about.  Some Credit Unions have also had great success revisiting debts written off in the past. Where the members financial situation has changed then there can be a better chance of recovery.