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: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Allowance as a percentage of trade receivables, gross = 100 × Allowance for doubtful accounts ÷ Trade receivables, gross
= 100 × 28 ÷ 2,868 = 0.98%
The analysis of the allowance for doubtful accounts from 2017 through 2021 reveals fluctuating credit risk assessments and changes in the valuation of trade receivables. While gross trade receivables remained relatively consistent, oscillating between approximately US$ 2.4 billion and US$ 2.8 billion, the provisioning for doubtful accounts exhibited more pronounced volatility.
- Allowance for Doubtful Accounts Trends
- A significant reduction in the allowance for doubtful accounts occurred between 2017 and 2019, where the balance fell from US$ 43 million to US$ 20 million. This downward trend reversed in 2020, with the allowance increasing to US$ 29 million, followed by a slight stabilization at US$ 28 million in 2021.
- Analysis of the Allowance Ratio
- The allowance as a percentage of gross trade receivables saw a sharp decline from 1.61% in 2017 to 0.79% in 2018. This ratio remained stable through 2019 at 0.81% before peaking again at 1.14% in 2020. By the end of 2021, the ratio moderated to 0.98%, indicating a general reduction in the proportion of receivables deemed uncollectible compared to 2017 levels.
- Relationship Between Gross Receivables and Provisioning
- In 2021, gross trade receivables reached a five-year peak of US$ 2,868 million. Despite this increase in total credit exposure, the allowance for doubtful accounts decreased slightly to US$ 28 million. This divergence suggests an improvement in the overall quality of the receivables portfolio or a more optimistic assessment of counterparty creditworthiness during the final period of analysis.
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