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: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30).
1 2020 Calculation
Allowance as a percentage of trade receivables, gross = 100 × Allowance for doubtful accounts ÷ Trade receivables, gross
= 100 × 23,900 ÷ 1,298,700 = 1.84%
The financial data indicates a cyclical pattern of volatility in the management of the allowance for doubtful accounts between 2015 and 2020. While gross trade receivables remained relatively stable, fluctuating within a range of approximately 1.2 billion to 1.46 billion US dollars, the allowance for doubtful accounts exhibited significant biennial oscillations.
- Allowance Volatility and Trends
- The allowance for doubtful accounts followed a distinct alternating pattern. Significant increases were recorded in 2017 (45.8 million US dollars) and 2019 (48.8 million US dollars), both of which were followed by sharp decreases in 2018 (24.0 million US dollars) and 2020 (23.9 million US dollars). This suggests a periodic adjustment process where provisions are aggressively increased and subsequently reduced, possibly due to specific write-offs or revisions in credit risk assessments.
- Allowance as a Percentage of Gross Receivables
- The ratio of the allowance to gross trade receivables mirrors the volatility of the absolute allowance values. The percentage peaked in 2017 at 3.75% and remained elevated in 2019 at 3.73%. Conversely, the ratio dropped to 1.56% in 2016 and returned to 1.84% by 2020. These fluctuations indicate that the credit risk profile or the conservative nature of the provisioning shifted significantly every two years.
- Correlation Between Receivables and Provisions
- There is no direct linear correlation between the volume of gross trade receivables and the size of the allowance. For instance, in 2016, the highest level of gross receivables (1.46 billion US dollars) coincided with the lowest allowance percentage (1.56%). In contrast, 2017 saw a decrease in gross receivables to 1.22 billion US dollars while the allowance percentage reached its peak of 3.75%. This implies that changes in the allowance were driven by qualitative risk factors or specific account impairments rather than the overall volume of outstanding trade receivables.
Overall, the credit loss provisioning strategy appears inconsistent on an annual basis but exhibits a repetitive two-year cycle of expansion and contraction. By the end of the period in 2020, the allowance as a percentage of trade receivables returned to its 2015 level of 1.84%, suggesting a return to a baseline risk assessment.
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