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Scope

This official policy provides authoritative guidance to the University in calculating an Uncollectible estimate, accounting for the provision of Uncollectible accounts, writing off Uncollectible balances, recording subsequent collection of invoices previously written off and collection procedures.

Reason for Policy

To ensure the timely collection of funds due to the University and ensure proper accounting for bad debts and write offs. 

Policy Statement

The University receives sponsored projects awards from various governmental and private entities. Sponsors generally require an invoice before paying the University for the award. For all sponsored projects, invoices are produced from the billing system.  Once an invoice is produced, a Grants Receivable is recorded and an aging process begins based on the date of the invoice.

While most sponsors pay invoices reliably, occasionally a sponsor is unable to fund the award they made to the University. Generally Accepted Accounting Principles (GAAP) direct that the University record a reasonable estimate of the amounts that will not be collected and periodically evaluate and write off any amounts determined to be Uncollectible.

Accounting for the Allowance for Uncollectible Grants Receivable
The GAAP method of recording the allowance requires that an expense be recorded with an offset to an allowance account. The University will use a modified approach that will both comply with GAAP while providing enhanced reporting throughout the year. This approach requires that an estimate be calculated and that an evaluation be made to compare the balance in the allowance account with the calculated estimate at the end of every year. An adjusting journal entry must be made to bring the Allowance for Doubtful Accounts account balance to the same balance as the estimate for Uncollectible invoices with an offsetting entry to the Bad Debts.

Estimated Uncollectible Amount
The process of calculating the estimate for Uncollectible accounts requires a rational estimate that follows GAAP.  The estimate the University uses is based on the aging of Receivables.  An Aging of Receivables Report is distributed to the campus Sponsored Programs Offices to determine collectability of outstanding invoices that are >120 days old at the end of the fiscal year.  The older an invoice is from the date the billed Receivable was recorded, generally correlates with a decreased likelihood that the amount will be collected. Based on historical collections of each aging category, a conservative estimate should be made of the Uncollectible amounts.  Based on the collectability information obtained from the Sponsored Programs Offices, the Controller’s Office will calculate an estimate of the total amount expected to be Uncollectible. A percentage is applied system-wide to each of the aging categories for the outstanding Receivables that are on the University’s financial books of record.

Write-off of Uncollectible Grants Invoices
The GAAP method presumes a routine collection process for each Receivable balance.  While routinely executing the collection procedures some of the balances will be considered Uncollectible. The procedure to write off a balance will be an approach that provides a more even flow of expenditures and a stable, more reasonable balance for the Allowance account.  This method is an important element in reporting more accurate financials that will provide reporting consistency and usefulness during the year and better reflect the net realizable value of assets.  Once a balance is determined to be Uncollectible, the University routinely turns the account balance information over to a company specializing in collection of older Receivables. When the individual Receivable balance has been turned over to a collection agency the amount is written-off, or removed from the University books.  The amounts are no longer reflected on the University financials and are no longer used in calculating the Allowance for Doubtful Accounts.

Collection Efforts
The Sponsored Programs Office (SPO) should use prudent judgment in collection efforts until all avenues of resolution have been exhausted. Those methods may include phone calls to the sponsor, continued Dunning and legal letters, legal action or other means to continue contact and collect past due invoices.

Throughout the collection process, it may be prudent to delay sending legal letters or turning the sponsor balance over to collection. If, in the judgment of management, reasonable progress is being made in negotiations for payment with the sponsor, a delay may be granted. A “Delay of Write-off” form should be completed for review by the designated responsible party in the SPO. The Delay of Write-off form is available in Outlook by selecting Tools, Forms, Choose Form, UM Request to Delay AR Write-Off.

The University General Counsel’s Office may choose to pursue collection of the past due invoices. The General Counsel will notify the SPO of legal actions they are taking. Notes should be entered into the Receivables system to record these actions.  Invoices will not be written off as long as General Counsel is actively pursuing collection efforts.

Subsequent collection of Grants Invoices previously written off
Some amounts that have been turned over to collection, or written off, are actually collected, less any collection fees.  To account for these amounts the entry made will be opposite the write-off entry to get the balance back on the books. An additional entry is made to reflect any earned interest, and then the normal process to record payment of the open item is followed. This process will effectively reduce the Bad Debt Expense in the period and increase cash.

Definitions

Grants Receivable - any amounts billed through PeopleSoft Billing for a sponsored project. This may include invoices billing for expenditures on a reimbursement basis, for a prepaid contract or a fixed price contract.

Dunning Letter – communication with customers to ensure the collection of account receivable.

Write-off of Uncollectible Balances - after a thorough collection process is followed by the University and it is determined that an invoice will not be paid in a reasonable time, the balance is no longer considered an asset and is not reflected on the financial statements. The process of removing the balance from the accounts Receivable balance on the financials is called write-off.

Allowance for Doubtful Accounts - a reasonable estimate based on historical collections and/or other reasonable rationale is used to record an estimate of the invoiced amounts that will become Uncollectible during the period. This amount is reflected as a contra-asset on the statement of net assets.

Aging of Receivables Report - a list of Receivables that is grouped or summed by category. Those categories are based on date ranges from the time the invoice was mailed.  Typical categories might be:  <30, 30-60, 61-90, 91-180, >180 days. As an example, if a sponsor had invoices dated 45 and 100 days from the current date there would be amounts reflected in both of the categories; 30-60 and 91-180.  For this accounting estimate, this aging is determined by the date of the invoice.

Accountabilities

UM System Controller’s Office:

• Provide functional/technical support for sponsored project accounting processes
• Provide functional/technical support for the billing and Receivable processes

Campus Sponsored Programs Offices:

• Invoice sponsors
• Monitor aging of sponsor invoices
• Regular communication with departments on aged invoices and collection efforts
• Apply payments from sponsors and collection agencies
• Mail Dunning Letters and legal letters; document reasons for letters not mailed to sponsors
• Write-off invoices after exhaustion of collection efforts
• Assist sponsors in follow-up requests for information
• Reversal of Write-offs for amounts subsequently collected
• Resolve collection issues with sponsor
• Complete Delay of Write-off forms if additional time is required in collection of outstanding invoices

Campus Departments:

• Complete Delay of Write-off forms and send to the SPO if additional time is required in collection of outstanding invoices
• Provide ChartField string to cover expenses on Uncollectible invoices charged to sponsored projects

Additional Details

Forms

Related Information

History

Formerly Accounting Policy Manual 60.10 – Allowance and Write-off for Uncollectible Grants Receivable (revised 5/25/2007)

Procedure