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 Doubtful Accounts

Time Warner monitors customer credit risk related to accounts receivable, including unbilled trade receivables primarily related to the distribution of television product. Significant judgments and estimates are involved in evaluating if such amounts will ultimately be fully collected. Each of Time Warner's businesses maintains a comprehensive approval process prior to issuing credit to third-party customers. Counterparties that are determined to be of a higher risk are evaluated to assess whether the credit terms previously granted to them should be modified. Time Warner monitors customers' accounts receivable aging, and a provision for estimated uncollectible amounts is maintained based on customer payment levels, historical experience and management's views on trends in the overall receivable agings. In addition, for larger accounts, Time Warner performs analyses of risks on a customer-specific basis. At December 31, 2017 and 2016, total reserves for doubtful accounts were approximately $162 million and $193 million, respectively. For the years ended December 31, 2017, 2016 and 2015, Time Warner recognized $11 million, $38 million and $63 million of bad debt expense, respectively.

Source: Time Warner Inc., Annual Report


Allowance for Doubtful Accounts Receivable

Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Allowance for doubtful accounts 162  193  180  152  261 
Receivables, gross 9,563  8,892  7,591  7,872  8,129 
Allowance as a percentage of receivables, gross1 1.69% 2.17% 2.37% 1.93% 3.21%

Source: Based on data from Time Warner Inc. Annual Reports

2017 Calculations

1 Allowance as a percentage of receivables, gross = 100 × Allowance for doubtful accounts ÷ Receivables, gross
= 100 × 162 ÷ 9,563 = 1.69%

Ratio Description The company
Allowance as a percentage of receivables, gross Allowance for doubtful accounts divided by the gross accounts receivable. Time Warner Inc.'s allowance as a percentage of receivables, gross declined from 2015 to 2016 and from 2016 to 2017.