Guide to Managing Receivables

Transactions that result in receivables are sometimes necessary to achieve program objectives and to meet operational requirements. Receivables need to be minimized because they could involve a risk that they will not be recovered.

To minimize receivables, departments can:

• review internal controls to ensure that:
  • overpayments or erroneous payments to suppliers and employees are avoided
  • overpayments or erroneous payments of grants, contributions or benefits to recipients are avoided
• ensure that employees who hold a travel card or an acquisition card understand their responsibilities in order to reduce instances of inappropriate use that would require recovery of expenses
• explore other methods of payment or other transactions before issuing accountable advances
• avoid entering into contracts that have terms and conditions that might create receivables (for example, contracts in which the acceptance of credit memos is part of the terms and conditions)
• require payment in advance or immediate payment
• establish a sound departmental credit policy (see subsection 4.4 of this guide)

As set out in subsection 4.3.2 of the Directive on Public Money and Receivables, departments may grant credit only when it is required for operational purposes. In other words, they may grant credit only when not doing so would:

• prevent them from accomplishing their mandate
• hamper achievement program objectives with regard to:
  • the ease of access to services
  • the type of clientele served
  • the frequency of transactions offered
  • a program strategy that supports desired outcomes

The requirement to grant credit only when required for operational purposes applies mostly to:

• the provision of goods and services
• the use of government facilities
• the rights and privileges conferred by the federal government

A department’s credit policy should include:

• what may be provided on credit, such as:
  • the types of goods and services provided
  • the facilities available for use
  • the rights and privileges conferred
• an appropriate segregation of duties in the granting of credit
• a process for assessing credit risk (for new customers)
• a minimum threshold value for credit sales
• the acceptable levels of credit risk
• the credit terms (the conditions under which credit is granted and the maximum credit limit)
• when payment is due and the interest rate that applies to late payments
• the minimum information necessary to extend credit
• the point at which, unless precluded by statute, the department may refuse to provide goods, services, use of facilities, and rights and privileges on credit because of unpaid debts to the Crown

Prompt and accurate recording of receivables helps:

• enable timely reporting
• make sure that the department’s financial information is complete and reliable
• resolve disputes when debtors challenge the validity of receivables
• ensure successful debt collection
• limit or avoid the need for further collection actions
• determine whether a debt is covered by a limitation period (see subsection 7.3 of this guide for information on statutes of limitations for debt collection)

Each receivable must have a collection file. A properly documented collection file contains:

• any documentary evidence that validates that a debt is owed to the Crown (for example, a loan agreement or a repayment arrangement)
• accurate, complete and up-to-date records of all communications with the debtor, including written demands for payments and notes from telephone conversations
• accurate documentation of any repayment arrangement made with the debtor
• accurate transactional information, such as the original receivable amount, any applicable interest, the balance due, and any payments received from the debtor

When it is expected that an account receivable may not be collected in whole or in part, an allowance for doubtful accounts is recorded to ensure an appropriate valuation of the account’s net realizable value. The net realizable value is not necessarily the amount legally receivable. For guidance on accounting for transactions that result in receivables and allowances for doubtful accounts, refer to the Accounts Receivable section of the Financial Information Strategy Accounting Manual.

Receivables are recorded in the department’s accounts and must not be removed until the department has received full payment or the debt has been remitted, forgiven, written off or waived in accordance with applicable legislative requirements. If a debt is written off and it becomes known in the future that the debtor’s financial position has improved and that the debtor is able to pay the debt, the account is reinstated and the debt is collected.

Adjustments to a department’s accounts receivable are administrative actions and do not require legislative or regulatory authority. Adjustments may occur when receivables are recorded in error or when the legitimacy of a debt cannot be substantiated.

Examples

1. A program expense was erroneously recorded in a department’s accounts as an account receivable. The department reviewed the transaction, confirmed that it was recorded incorrectly, and made an adjustment to the account to record the amount as an expense and remove the receivable.
2. A department erroneously made a payment to an individual. The department must recover the payment, so it must establish an account receivable. Because the debt is substantiated by departmental records, the account receivable should be removed only when the erroneous payment has been fully recovered or when a write-off, remission, forgiveness or waiver has been authorized.

Treating debtors fairly entails the following:

• communicating openly with debtors
• informing debtors of the status of their account
• applying legislation and policies consistently to all debtors
• informing debtors of their obligations under the applicable legislation and of any administrative review or appeal processes that could provide relief or redress
• explaining to debtors the consequences of non-payment or late payment
• responding to debtors’ requests for information
• making sure that information provided to debtors is accurate, understandable and timely
• making timely demands for payment (see subsection 6.2 for more information)
• considering debtors’ financial situation and any other special circumstances when collecting debts

Making timely demands for payments, in writing, helps ensure successful collection of debts. Demands can take the form of, for example, invoices, bills, statements or other documents.

Demands for payments should include the following elements, as applicable:

• details on current charges
• details on payments received from the debtor
• the total amount due
• clear payment terms (for example, “The total amount owing is due within 30 days after the invoice date.”)
• a notice that interest will be charged on late payments

This section outlines some practices for collecting receivables. These practices are used in everyday commerce in both public and private sectors.

Departments may use a range of methods to collect debts owed to the Crown. Departmental officers who manage receivables should choose the most appropriate and cost-effective collection method for each circumstance, starting with the most straightforward method and progressing to more complex methods, if necessary. Subsections 7.2.1 to 7.2.8 describe the possible methods in order of least complex to most complex.

The period for collecting a debt may be subject to the limitations set out in the Crown Liability and Proceedings Act, another federal statute or a provincial statute. Departments should consult departmental legal services to confirm the applicable limitation period.

When permitted, departments, agencies and Crown corporations may and should share information and resources in order to locate debtors and collect debts owed to the Crown.