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 receivables, gross = 100 × Allowances for bad debts ÷ Receivables, gross
= 100 × 738 ÷ 5,972 = 12.36%
An analysis of the allowance for doubtful accounts from 2014 through 2018 reveals a significant escalation in the estimated credit risk associated with receivables. While gross receivables experienced a period of contraction followed by a recovery, the provisions for bad debts grew aggressively, leading to a substantial increase in the relative risk profile by 2017.
- Allowances for Bad Debts
- The absolute value of the allowance for bad debts demonstrated a sharp upward trajectory, rising from 137 million US dollars in 2014 to 738 million US dollars in 2018. The most critical shift occurred between 2016 and 2017, during which the allowance increased from 175 million US dollars to 725 million US dollars, indicating a substantial increase in anticipated credit losses.
- Gross Receivables Trends
- Gross receivables showed significant volatility over the five-year period. A downward trend was observed from 2014 to 2016, with balances declining from 7,701 million US dollars to 4,097 million US dollars. This contraction was subsequently reversed, with gross receivables expanding to 5,972 million US dollars by the end of 2018.
- Allowance as a Percentage of Gross Receivables
- The ratio of allowances to gross receivables indicates a growing conservatism in financial reporting. The percentage rose moderately from 1.78% in 2014 to 4.27% in 2016, followed by a sharp spike to 12.58% in 2017. This ratio remained elevated at 12.36% in 2018, suggesting that a significantly larger proportion of the total receivables balance was deemed uncollectible compared to the baseline in 2014.
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