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General Electric Co. (GE)
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
LOSSES ON FINANCING RECEIVABLES
GE’s financing receivables portfolio consists of a variety of loans and leases, including both larger-balance, non-homogeneous loans and leases and smaller-balance homogeneous loans and leases. GE routinely evaluates the entire portfolio for potential specific credit or collection issues that might indicate an impairment.
Losses on financing receivables are recognized when they are incurred, which requires GE to make the best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of losses depends on the size, type and risk characteristics of the related financing receivable. Such an estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral values, and the present and expected future levels of interest rates. The underlying assumptions, estimates and assessments GE uses to provide for losses are updated periodically to reflect the view of current conditions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible that GE will experience credit losses that are different from the current estimates. Write-offs are deducted from the allowance for losses when GE judges the principal to be uncollectible and subsequent recoveries are added to the allowance at the time cash is received on a written-off account.
Source: 10-K (filing date: 2019-02-26).
Allowance for Doubtful Accounts Receivable
Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).
2018 Calculations
1 Allowance as a percentage of current receivables, gross = 100 × Allowance for losses ÷ Current receivables, gross
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Allowance as a percentage of current receivables, gross | Allowance for doubtful accounts divided by the gross accounts receivable. | General Electric Co.’s allowance as a percentage of current receivables, gross increased from 2016 to 2017 and from 2017 to 2018. |
Allowance for Credit Losses
Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27).
2018 Calculations
1 Allowance as a percentage of financing receivables, gross = 100 × Allowance for losses ÷ Financing receivables, gross
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Allowance as a percentage of financing receivables, gross | Allowance for credit losses divided by the gross financing receivable. | General Electric Co.’s allowance as a percentage of financing receivables, gross increased from 2016 to 2017 but then declined significantly from 2017 to 2018. |