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Hello Fintax Community,

As businesses face the constant challenge of managing bad debts, it is crucial for companies to be aware of the new regulations that impact the treatment of allowances for doubtful accounts receivable. On October 18, 2024, the Indonesian Ministry of Finance introduced PMK No. 74/2024, which updates the previous regulations regarding the deductibility of allowances for doubtful accounts. This new regulation aims to provide clearer guidance for businesses while offering fiscal incentives through deductions on gross income.

The key points of PMK 74/2024 include two primary methods for handling bad debts:

1. Write-off of Receivables:

This method applies when receivables are deemed non-collectible. In such cases, businesses can write off these receivables as deductible expenses, but they must meet specific documentation and administrative requirements.

2. Allowances for Doubtful Accounts:

This proactive approach allows businesses to set aside an allowance (provision) for doubtful accounts from the initial recognition of receivables. This allowance is calculated as a deductible expense, offering a more anticipatory approach to managing bad debt.

Who Can Form an Allowance?

PMK 74/2024 restricts the ability to form an allowance for doubtful accounts to specific business types, including:

• Financial Institutions: Banks, consumer finance companies, factoring companies, and financial leasing companies.

• Other Business Entities: Savings and loan cooperatives, asset management companies, financing companies, microfinance institutions, and various other specialized financial institutions.

Allowance Calculation Method:

The regulation outlines a method for calculating the allowance, which involves subtracting the allowance at the beginning of the year from the allowance at the end of the year. There are a few important considerations:

• Accounting Standards: Taxpayers can use Indonesia’s prevailing financial accounting standards, but the amount calculated for tax purposes cannot exceed specific limits set out by the regulation.

• Maximum Limit: The allowance is capped at the lower of the amount determined by accounting standards or the limit set in PMK 74/2024.

• Grouping of Receivables: Receivables must be categorized into groups based on their quality, such as good, poor, or bad, or according to their collectability (Pass, Special Mention, Substandard, Doubtful, Loss).

• Collateral Considerations: The value of collateral is deducted from the receivables when calculating the allowance, with different deduction percentages based on the type of collateral.

Transition from PMK 81/2009:

For businesses transitioning from the previous PMK 81/2009, there are additional provisions to handle any discrepancies in allowances between the two regulations:

• Excess Allowance: If the allowance at the beginning of 2024 exceeds what was calculated under PMK 81/2009, the excess amount can be deducted over the next two fiscal years.

• Shortfall in Allowance: If the allowance is lower than under the previous regulation, the shortfall must be recognized as income in 2024.

Requirements for the Write-off Method:

Businesses opting to write off bad debts must submit documentation proving that the receivables are uncollectible. This includes:

• Proof of Bad Debt: Documents such as bankruptcy statements, death certificates, or confirmation from an authorized agency regarding the debtor’s inability to pay.

• Collection Efforts: Evidence of reasonable efforts made to collect the debt, such as correspondence or visits to the debtor’s business.

• Supporting Documents: A detailed list of bad debts, along with proof of collection efforts.

Why This Matters for Businesses:

PMK 74/2024 is an important tool for businesses managing bad debts in Indonesia. It helps provide legal certainty and transparency regarding how bad debts can be treated for tax purposes. By understanding the requirements and implementing the provisions of this regulation, businesses can more effectively manage credit risks, avoid tax penalties, and improve their financial health.