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: 2017-08-31), 10-K (reporting date: 2016-08-31), 10-K (reporting date: 2015-08-31), 10-K (reporting date: 2014-08-31), 10-K (reporting date: 2013-08-31), 10-K (reporting date: 2012-08-31).
1 2017 Calculation
Allowance as a percentage of trade receivables, gross = 100 × Allowance for doubtful trade receivables ÷ Trade receivables, gross
= 100 × 78 ÷ 2,239 = 3.48%
The analysis of the allowance for doubtful accounts between August 31, 2012, and August 31, 2017, reveals a period of volatility in both total credit exposure and the estimated risk of non-payment. While gross trade receivables exhibited fluctuating trends, the allowance as a percentage of receivables remained relatively stable, with one significant deviation in 2016.
- Gross Trade Receivables Evolution
- Gross trade receivables demonstrated a non-linear trajectory, shifting from US$ 1,961 million in 2012 to US$ 2,239 million by 2017. A notable contraction occurred in 2015, where receivables dropped to a period low of US$ 1,695 million, before recovering sharply over the following two years.
- Allowance for Doubtful Trade Receivables
- The absolute value of the allowance for doubtful accounts increased from US$ 64 million in 2012 to US$ 78 million in 2017. The most prominent movement occurred in 2016, when the allowance peaked at US$ 94 million, indicating a higher volume of reserves set aside for potential credit losses during that specific fiscal period.
- Relative Credit Risk Analysis
- The allowance as a percentage of gross trade receivables served as a consistent indicator of credit risk, generally fluctuating between 3.26% and 3.81%. A significant outlier was observed in 2016, where the ratio spiked to 4.65%. This increase suggests a temporary escalation in the perceived risk of default or a more conservative approach to loss estimation. By August 31, 2017, the ratio normalized to 3.48%, returning to levels consistent with the 2014 and 2015 periods.
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Allowance for Credit Losses
Based on: 10-K (reporting date: 2017-08-31), 10-K (reporting date: 2016-08-31), 10-K (reporting date: 2015-08-31), 10-K (reporting date: 2014-08-31), 10-K (reporting date: 2013-08-31), 10-K (reporting date: 2012-08-31).
1 2017 Calculation
Allowance as a percentage of long-term customer receivables, gross = 100 × Allowance for credit losses ÷ Long-term customer receivables, gross
= 100 × 277 ÷ 675 = 41.04%
Between fiscal years 2012 and 2017, there was a marked increase in both long-term customer receivables and the associated allowance for credit losses, with growth accelerating significantly in the final two years of the period.
- Gross Long-term Customer Receivables
- Gross long-term receivables exhibited volatility between 2012 and 2015, reaching a low of 216 million USD in 2013. A significant upward trajectory began in 2016, with values rising to 488 million USD, and continuing to 675 million USD by August 31, 2017. This indicates a substantial expansion of the long-term credit exposure over the observed period.
- Allowance for Credit Losses
- The allowance for credit losses mirrored the trend of the gross receivables. After fluctuating between 104 million USD and 141 million USD from 2012 to 2015, the allowance increased sharply to 228 million USD in 2016 and 277 million USD in 2017. This suggests a proportional increase in the reserves allocated to cover potential defaults as the volume of long-term receivables grew.
- Allowance Percentage Analysis
- The ratio of the allowance to gross long-term receivables remained relatively stable, fluctuating within a range of 41.04% to 48.15%. A peak was observed in 2013 at 48.15%. By August 31, 2017, the ratio declined to 41.04%, its lowest point in the period. This indicates that although the absolute value of the allowance increased in 2017, the growth of gross long-term receivables outpaced the increase in the allowance.
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