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: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31).
1 2017 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowance for doubtful accounts ÷ Receivables, gross
= 100 × 162 ÷ 9,563 = 1.69%
An analysis of credit loss reserves from 2013 to 2017 reveals a divergence between the growth of gross receivables and the maintenance of the allowance for doubtful accounts. While the total volume of receivables increased over the five-year period, the reserve allocated for potential losses generally decreased, indicating a shift in the risk profile or a change in the valuation methodology for uncollectible accounts.
- Gross Receivables Trajectory
- Gross receivables experienced a slight contraction between 2013 and 2015, decreasing from 8,129 million USD to 7,591 million USD. However, a significant expansion occurred starting in 2016, with the balance rising to 9,563 million USD by December 31, 2017, marking a substantial increase in total outstanding credit exposure.
- Allowance for Doubtful Accounts Trends
- The absolute value of the allowance for doubtful accounts showed volatility, beginning at 261 million USD in 2013 and dropping sharply to 152 million USD in 2014. Despite moderate increases in 2015 and 2016, the allowance concluded the period at 162 million USD in 2017, remaining significantly below the 2013 baseline.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross receivables demonstrated a general downward trend. The ratio fell from a peak of 3.21% in 2013 to a period low of 1.69% in 2017. This decline suggests that a smaller proportion of receivables is being reserved for potential bad debts over time, which may reflect improved customer creditworthiness or a strategic reduction in the conservatism of the allowance estimates.
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