Receivables and Expected Credit Losses
Receivables and Expected Credit Losses
Gross receivables show contractual claims. Net receivables show those claims after an allowance for expected losses.
Northstar aging matrix
At year-end:
| Aging band | Gross balance | Expected-loss rate | Allowance |
|---|---|---|---|
| Current | £80,000 | 1% | £800 |
| 1–30 days overdue | £20,000 | 3% | £600 |
| 31–90 days overdue | £8,000 | 12% | £960 |
| More than 90 days | £2,000 | 45% | £900 |
| Total | £110,000 | £3,260 |
The rates are teaching assumptions, not standard percentages. In practice Northstar would support them with historical defaults, current conditions, customer-specific information and reasonable forecasts.
After write-offs, the existing allowance has a £1,900 credit balance. The required closing balance is £3,260:
Dr Expected credit loss expense £1,360
Cr Loss allowance £1,360
Net receivables are £106,740.
Write-off is not a second loss estimate
When a £700 account has no reasonable recovery prospect:
Dr Loss allowance £700
Cr Trade receivables £700
The write-off uses the allowance already recognised. If cash is later recovered, reinstate the receivable/allowance as required by the entity’s method, then record the collection.
IFRS 9 teaching map
| Asset situation | Introductory model |
|---|---|
| Trade receivables using the simplified approach | Lifetime expected credit losses |
| Other financial assets with no significant credit deterioration | Generally 12-month expected credit losses |
| Significant increase in credit risk | Lifetime expected credit losses |
| Credit-impaired | Lifetime losses, with changed interest-revenue mechanics |
Expected credit losses are probability-weighted cash shortfalls, reflect time value where material and use reasonable forward-looking information. They are not limited to debts already known to be bad.
US GAAP boundary
ASC 326’s CECL model generally estimates lifetime expected credit losses for assets in scope using historical experience, current conditions and reasonable, supportable forecasts. Its architecture differs from IFRS 9’s staging model.
FASB ASU 2025-05, effective for annual periods beginning after 15 December 2025, adds practical relief for current Topic 606 receivables and contract assets. That update does not turn a historical bad-debt percentage into a universal answer; elections and scope still matter.
What can make the matrix wrong?
- old data after a change in customer mix;
- one large customer hidden inside a pooled rate;
- forecasts counted twice;
- overdue balances cured after the reporting date but ignored;
- management optimism unsupported by collections;
- a contract asset treated as an unconditional receivable.
Quick check
If the required allowance becomes £4,100 and the pre-adjustment credit balance remains £1,900, what is the expense?