Impairment of Receivables – Recognition, Measurement, and Accounting Treatment

Impairment of receivables refers to the process of adjusting the carrying amount of trade or note receivables when collection in full is no longer expected. This ensures that receivables are reported at net realizable value, reflecting the amount the entity expects to collect.

This article outlines the accounting treatment of impaired receivables under U.S. GAAP (ASC 310 and ASC 326 – CECL model) and IFRS 9, including recognition, measurement, write-offs, recovery entries, and required disclosures.

1. Overview and Definition

Receivables are considered impaired when there is objective evidence that the full amount due under the original terms is not collectible.

✦ Indicators of impairment include:

✦ Significant financial difficulty of the debtor

✦ Breach of contract (e.g., default or delinquency)

✦ Restructuring or concessions granted by the creditor

✦ Observable data indicating economic decline in a sector

The goal is to estimate and recognize expected credit losses before a default occurs.

2. Accounting Frameworks

Under U.S. GAAP (ASC 326 – CECL):

✦ Entities must recognize lifetime expected credit losses upon initial recognition of the receivable.

✦ Estimation incorporates historical experience, current conditions, and reasonable forecasts.

✦ Applies to trade receivables, notes receivable, and lease receivables.

Under IFRS 9:

✦ Trade receivables follow the simplified model, with lifetime expected losses recorded from the start.

✦ Non-trade financial assets may use a 3-stage model, but this is uncommon for short-term trade balances.

3. Measurement of Impairment

Impairment is measured as the difference between the gross carrying amount and the present value of expected cash flows.

In practice, many entities apply percentage-based loss rates using:

✦ Aging schedules (e.g., 0–30, 31–60, 61–90 days past due)

✦ Historical default rates

✦ Customer credit scoring

✦ Economic forecasts

To record expected impairment: Dr. Bad Debt Expense – $8,000 / Cr. Allowance for Doubtful Accounts – $8,000.

4. Journal Entries and Examples

Initial recognition of allowance:

Dr. Bad Debt Expense – $12,000 / Cr. Allowance for Doubtful Accounts – $12,000.

Writing off a specific receivable:

Dr. Allowance for Doubtful Accounts – $3,000 / Cr. Accounts Receivable – $3,000.

Recovering a previously written-off balance:

Dr. Accounts Receivable – $3,000 / Cr. Allowance for Doubtful Accounts – $3,000. Dr. Cash – $3,000 / Cr. Accounts Receivable – $3,000.

5. Aging Analysis and Portfolio Segmentation

Most companies apply an aging-based model to estimate impairments:

✦ Current: 0.5% expected loss

✦ 31–60 days overdue: 5% expected loss

✦ 61–90 days: 15%

✦ Over 90 days: 40–60%

Portfolios may also be segmented by:

✦ Customer type (e.g., retail vs. wholesale)

✦ Industry risk profile

✦ Geographic region

✦ Credit limits and exposure levels

Segmentation improves precision in estimating lifetime losses.

6. Notes Receivable and Impairment

For notes receivable, entities estimate impairment in the same way, using discounted expected cash flows when repayment is doubtful.

To record a note impairment: Dr. Bad Debt Expense – $5,000 / Cr. Allowance for Notes Receivable – $5,000.

To write off a note: Dr. Allowance for Notes Receivable – $5,000 / Cr. Notes Receivable – $5,000.

Interest income on impaired notes is recognized only when collectibility becomes probable.

7. Disclosures

Entities must disclose:

✦ The methodology used to estimate expected credit losses

✦ Information about changes in credit risk

✦ Rollforward of the allowance account

✦ Credit quality indicators (e.g., aging, delinquency rates)

✦ Recovery and write-off activity

These disclosures provide transparency into how entities manage credit risk and estimate future losses.