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Analysis of Bad Debts
Difficulty: Advanced
Allowance for doubtful accounts receivable (bad debts) is a contra account which reduce the balance of the company’s gross accounts receivable.The relationship between the allowance and the balance in receivables should be relatively constant unless there is a change in the economy overall or a change in customer base.
Receivables Accounting Policy
Accounts Receivable
The majority of Biogen’s accounts receivable arise from product sales and primarily represent amounts due from the wholesale and other third-party distributors, public hospitals, pharmacies and other government entities and have standard payment terms that generally require payment within 30 to 90 days.
Biogen does not adjust the receivables for the effects of a significant financing component at contract inception if Biogen expects to collect the receivables in one year or less from the time of sale.
In countries where Biogen has experienced a pattern of payments extending beyond the contractual payment term and Biogen expects to collect receivables greater than one year from the time of sale, Biogen has assessed whether the customer has a significant financing component and discounted the receivables and reduced related revenues over the period of time that Biogen estimates those amounts will be paid using the country’s market-based borrowing rate for such period. The related receivables are classified at the time of sale as non-current assets. Biogen accretes interest income on these receivables, which is recorded as a component of other income (expense), net in the consolidated statements of income.
Biogen provides reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve.
The adoption of the new revenue standards did not change Biogen’s historical accounting methods for the accounts receivable.
Source: 10-K (filing date: 2019-02-06).
Allowance for Doubtful Accounts Receivable
Based on: 10-K (filing date: 2019-02-06), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-02), 10-K (filing date: 2016-02-03), 10-K (filing date: 2015-02-04).
2018 Calculations
1 Allowance as a percentage of accounts receivable, gross = 100 × Reserves for allowances ÷ Accounts receivable, gross
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Allowance as a percentage of accounts receivable, gross | Allowance for doubtful accounts divided by the gross accounts receivable. | Biogen Inc.’s allowance as a percentage of accounts receivable, gross declined from 2016 to 2017 and from 2017 to 2018. |