In a decision dated September 27, 1995, the Administrative Court of Appeal of Lyon had to examine the following method employed by a company in order to calculate the amount of its provisions for bad debts. The company calculated for each customer a theoretical credit limit with a mathematical model including 32 criteria. This limit was then adjusted according to the customer's specific conditions. The amount of the provision was eventually determined by applying a 40 % rate to the difference between the actual amount of receivables due by the customer and the above mentioned limit of credit.

The above mentioned method has been rejected by the Court. Indeed, the Court considered that according French tax law principles a provision for bad debt has to be based on the occurrence of events that make probable a loss or an expense, whereas the provisions booked by the company were actually based on the probability of the occurrence of such events. Such a method does not therefore comply with French domestic tax law principles, however precise it may be.

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