- May 10, 2026
- Posted by: АРОУ
- Category: Publications
Creating allowances for doubtful accounts receivable is a lawful financial and tax planning tool provided for by accounting standards. However, tax authorities often view such reserves as a potential understatement of taxable profit. To avoid penalties and additional tax assessments, businesses must understand the legal and tax risks associated with this process.
What Is an Allowance for Doubtful Debts?
An allowance is an estimate of potential losses related to a debtor’s failure to fulfill payment obligations. This approach complies with the prudence principle in accounting.
According to Ukrainian Accounting Standard (UAS) 10 “Accounts Receivable,” a company may create an allowance for doubtful debts if there are grounds to believe that a debtor will fail to meet obligations within the established period.
Why Are Allowances Created?
- reduction of financial results (profit) in the reporting period;
- proper reflection of expected cash flows;
- increased transparency of reporting for investors, auditors, and banks;
- creation of a legal basis for writing off bad debts in the future.
Main Tax Risks
Lack of Proper Justification for Doubtful Debt Status
Tax authorities often require evidence confirming that a receivable is genuinely doubtful, including non-payment, correspondence, reconciliation statements, and claims.
Businesses should:
- retain letters and notifications;
- document pre-trial settlement attempts;
- prepare reconciliation statements;
- record payment delays.
Allowance Created for Debt That Does Not Meet Doubtful Debt Criteria
An allowance cannot be created for debts that are not overdue or are secured by guarantees or collateral.
It is necessary to verify:
- the debt maturity period;
- the existence of security;
- the realistic possibility of debt recovery.
Errors in Calculation and Documentation
Common mistakes include:
- incorrect calculation methods;
- absence of an internal order establishing the allowance;
- inconsistency with accounting policies.
Businesses should:
- adopt internal procedures for allowance creation;
- issue proper internal orders;
- ensure consistency with accounting policies.
Impact on Corporate Income Tax
Allowances created under Ukrainian accounting standards do not always automatically reduce taxable profit.
Businesses must comply with paragraph 139.2 of the Tax Code of Ukraine and correctly apply tax adjustments.
Otherwise, tax authorities may:
- assess additional corporate income tax;
- impose penalties and interest.
What Does the Tax Authority Review?
During audits, tax authorities usually examine:
- grounds for recognizing receivables as doubtful;
- frequency of receivables analysis;
- documents related to allowance calculations and creation;
- compliance with accounting policies;
- accuracy of financial reporting.
How to Protect Your Business Before an Audit
Businesses are advised to:
- develop a clear methodology for creating allowances;
- approve internal regulations and orders;
- regularly inventory accounts receivable;
- maintain records of claim-related work;
- involve lawyers and auditors to verify proper documentation.
Legal Liability for Violations
If tax authorities establish improper creation of allowances, the following consequences are possible:
- additional corporate income tax assessments;
- penalties and interest charges;
- claims regarding inaccurate financial reporting;
- additional inspections of business operations.
Conclusion
An allowance for doubtful debts is not merely an accounting formality but an important financial risk management tool. However, improper use may lead to significant tax consequences.
To avoid claims from regulatory authorities, businesses should ensure proper legal and documentary justification for allowances and involve qualified professionals.
The Ukrainian Bar and Realtor Association provides comprehensive legal support regarding tax audits, accounts receivable management, and business protection.
