Danaher Corp. (DHR)
Analysis of Bad Debts
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.
Accounting Policy on Receivables
Accounts Receivable and Allowances for Doubtful Accounts
All trade accounts, contract and finance receivables are reported on the accompanying Consolidated Balance Sheets adjusted for any write-offs and net of allowances for doubtful accounts. The allowances for doubtful accounts represent management’s best estimate of the credit losses expected from Danaher’s trade accounts, contract and finance receivable portfolios. Determination of the allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, therefore, net earnings. Danaher regularly performs detailed reviews of its portfolios to determine if an impairment has occurred and evaluates the collectability of receivables based on a combination of various financial and qualitative factors that may affect customers’ ability to pay, including customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information. In circumstances where Danaher is aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected. Additions to the allowances for doubtful accounts are charged to current period earnings, amounts determined to be uncollectible are charged directly against the allowances, while amounts recovered on previously written-off accounts increase the allowances. If the financial condition of Danaher’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves would be required. Danaher does not believe that trade accounts receivable represent significant concentrations of credit risk because of the diversified portfolio of individual customers and geographical areas. Danaher recorded $36 million, $33 million and $33 million of expense associated with doubtful accounts for the years ended December 31, 2018, 2017 and 2016, respectively.
Included in Danaher’s trade accounts receivable and other long-term assets as of December 31, 2018 and 2017 are $219 million and $213 million of net aggregate financing receivables, respectively. All financing receivables are evaluated for impairment based on individual customer credit profiles.
Source: 10-K (filing date: 2019-02-21).
Allowance for Doubtful Accounts Receivable
1 2018 Calculation
Allowance as a percentage of trade accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Trade accounts receivable, gross
= 100 × ÷ =
|Financial ratio||Description||The company|
|Allowance as a percentage of trade accounts receivable, gross||Allowance for doubtful accounts divided by the gross accounts receivable.||Danaher Corp.’s allowance as a percentage of trade accounts receivable, gross increased from 2016 to 2017 and from 2017 to 2018.|