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: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).
1 2018 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts and authorized credits ÷ Accounts receivable, gross
= 100 × 106 ÷ 818 = 12.96%
An analysis of the credit risk management from 2014 to 2018 reveals a consistent increase in the proportion of accounts receivable deemed doubtful, despite fluctuations in the total volume of gross receivables.
- Gross Accounts Receivable Trends
- Gross accounts receivable experienced a contraction between 2014 and 2016, declining from 899 million USD to 673 million USD. This downward trend reversed starting in 2017, with balances increasing to 797 million USD and eventually reaching 818 million USD by the end of 2018.
- Allowance for Doubtful Accounts and Authorized Credits
- The absolute value of the allowance for doubtful accounts followed a trajectory similar to that of the gross receivables. The allowance decreased from 102 million USD in 2014 to a low of 81 million USD in 2016, before increasing sequentially to 102 million USD in 2017 and 106 million USD in 2018.
- Analysis of the Allowance Ratio
- While absolute figures fluctuated, the allowance as a percentage of gross accounts receivable demonstrated a linear upward trend. The ratio grew steadily every year, moving from 11.35% in 2014 to 12.96% in 2018. This continuous increase indicates a rising expectation of credit losses relative to the total receivables balance or a shift toward a more conservative provisioning policy over the five-year period.
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