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International Business Machines Corp. (IBM)
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
Allowance for Credit Losses
Receivables are recorded concurrent with billing and shipment of a product and/or delivery of a service to customers. A reasonable estimate of probable net losses on the value of customer receivables is recognized by establishing an allowance for credit losses.
Contract Assets and Notes and Accounts Receivable — Trade
As of January 1, 2018, IBM classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to consideration that is conditional upon factors other than the passage of time. The majority of IBM’s contract assets represent unbilled amounts related to design and build services contracts when the cost-to-cost method of revenue recognition is utilized, revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client acceptance. Contract assets are generally classified as current and are recorded on a net basis with deferred income (i.e., contract liabilities) at the contract level. At December 31, 2018 and January 1, 2018 contract assets of $470 million and $557 million, respectively, are included in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. At December 31, 2017, these assets were classified as notes and accounts receivable–trade in the Consolidated Statement of Financial Position.
An allowance for contract assets, if needed, and uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts.
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: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).
2018 Calculations
1 Allowance as a percentage of notes and accounts receivable, gross = 100 × Allowances for doubtful notes and accounts receivable ÷ Notes and accounts receivable, gross
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Allowance as a percentage of notes and accounts receivable, gross | Allowance for doubtful accounts divided by the gross accounts receivable. | International Business Machines Corp.’s allowance as a percentage of notes and accounts receivable, 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: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).
2018 Calculations
1 Allowance as a percentage of financing receivables, gross = 100 × Allowance for credit 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. | International Business Machines Corp.’s allowance as a percentage of financing receivables, gross declined from 2016 to 2017 and from 2017 to 2018. |