What Does a Board and Manager Need to Know About Bad Debt Allowance and Write-off?

Due to the current economy and the fact that some unit owners owe more on their property than it is worth, there is the potential for write-off of receivable balances – either whole or in part. Generally accepted accounting principles state that any asset should be booked at its real value. So, what to do when there is a potentially uncollectible account?? An Allowance for Bad Debts must be recorded on the financial statements. This effectively reduces the value of the receivable

This is something that must be decided BEFORE the audit process begins. This is a very subjective decision and it is something that is to be decided by the Board (with assistance and direction from the manager, as appropriate). If it is not, it is an Internal Control Deficiency. You don’t need to book the entry, but you need to advise the CPA of the decision.

That said, once the Association makes the decision, we, as auditors, must decide if it is reasonable. We are going to be very conservative in these economic times. So, err on the side of a larger allowance – you can always bring it into income next year. You can set up the allowance based on specific accounts and your determination as to whether they are collectible. One of our frequently suggested way of making that estimate is as follows:

            Fully Collectible                                   -          0%       Bad Debt Allowance
            Unknown/Possible Bad Debt               -          50%     Bad Debt Allowance
            Bankruptcy/Real Probability
                        Of Write-Off                            -          100%   Bad Debt Allowance  

For condominiums we will reduce the allowance by 6 months of assessments, unless you let us know that the lien requirements were not met and no assessments will be collected.

What about when the bad debt is actually written off?

If the management company has the authority to write off amounts below a certain amount, be sure that that is in writing and that a copy of that authorization is provided to the auditor.

For all other bad debt write-offs, the Board must approve them. A copy of the Board meeting minutes approving the write off (with a specific dollar amount mentioned) should be attached to the adjustment.
This is a very important internal control procedure.