Analysis of Bad Debts
Allowance for doubtful accounts receivable (bad debts) is a contra account which reduce the balance of the company 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.
Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2019-08-31), 10-K (reporting date: 2018-08-31), 10-K (reporting date: 2017-08-31), 10-K (reporting date: 2016-08-31), 10-K (reporting date: 2015-08-31), 10-K (reporting date: 2014-08-31).
1 2019 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 95 ÷ 7,321 = 1.30%
Between fiscal years 2014 and 2019, the credit risk profile regarding accounts receivable exhibited a significant shift, characterized by a substantial expansion in total receivables alongside a simultaneous reduction in the allowance for doubtful accounts.
- Gross Accounts Receivable Trends
- A significant increase in gross accounts receivable occurred between August 2014 and August 2015, where the balance rose from US$ 3,391 million to US$ 7,021 million. Following this initial surge, the gross receivables remained relatively stable, fluctuating between US$ 6,426 million and US$ 7,321 million through August 2019.
- Allowance for Doubtful Accounts Analysis
- The absolute value of the allowance for doubtful accounts followed a consistent downward trajectory for the majority of the period. After a gradual decline from US$ 173 million in 2014 to US$ 158 million in 2017, a sharp contraction was observed in 2018, with the allowance dropping to US$ 75 million. A slight recovery followed in 2019, with the balance rising to US$ 95 million.
- Allowance as a Percentage of Gross Receivables
- The ratio of the allowance to gross accounts receivable demonstrated a marked contraction, indicating a reduction in the anticipated loss rate. The percentage fell sharply from 5.10% in 2014 to 2.45% in 2015, remaining within a narrow range until 2017. A period low of 1.13% was reached in 2018, before ending the period at 1.30% in 2019.
The divergence between the rising gross receivables and the decreasing allowance suggests a significant shift in the valuation of credit risk. The reduction of the allowance ratio from 5.10% to 1.30% over the five-year period indicates either a substantial improvement in the quality of the debtor portfolio or a modification in the internal methodology used to estimate credit losses.
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