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: 2023-09-30), 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30).
1 2023 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for expected credit losses ÷ Accounts receivable, gross
= 100 × 90 ÷ 6,096 = 1.48%
The analysis of credit loss allowances from 2018 to 2023 reveals a distinct shift in the management of expected credit losses and the overall composition of accounts receivable.
- Gross Accounts Receivable Trends
- Gross accounts receivable experienced a significant contraction between September 30, 2018, and September 30, 2020, decreasing from 7,242 million USD to 5,467 million USD. Following this initial decline, the balance remained relatively stable, ending with a moderate increase to 6,096 million USD by September 30, 2023.
- Allowance for Expected Credit Losses
- The absolute value of the allowance for expected credit losses remained steady between 173 million USD and 177 million USD from 2018 through 2020. A sharp downward trend occurred starting in 2021, with the allowance falling to 110 million USD and reaching a period low of 62 million USD in 2022, before a slight rebound to 90 million USD in 2023.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross accounts receivable peaked at 3.16% in 2020, reflecting a period of increased risk allocation. This was followed by a substantial decline to 1.11% by 2022, suggesting a significant improvement in the credit quality of the receivables portfolio or a revision in the underlying estimation models. The ratio increased slightly to 1.48% in 2023, though it remains considerably lower than the levels observed between 2018 and 2020.
In summary, the data demonstrates that while gross receivables have partially recovered toward 2023 levels, the credit loss allowance has not returned to its previous benchmarks. This indicates a more aggressive or optimistic valuation of the recoverability of accounts receivable compared to the 2018-2020 period.
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