From time to time, in most large groups the situation will arise where one company has built up indebtedness to another by purchasing goods or services on trading account, which it is unable to pay for.
In an arm’s length situation, the supplier would undertake collection action, while simultaneously making at least partial provision against the debt for expected uncollectability. Following the adoption of IFRS, strictly speaking there are no “bad debt provisions” only “impairment reserves”, but the underlying concept is similar. The supplier would normally expect to get a tax deduction for its bad debt provision (UK GAAP) or impairment reserve (IFRS) if properly calculated in relation to specific debts.
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