Allowance for doubtful accounts

A write-off and an estimate reversal have different effects

Hypothetical: writing off a receivable already fully provided for reduces both gross receivables and the allowance, without a new earnings benefit. Separately, a supported reduction in estimated credit losses can reverse previously recognized expense.

Source: IFRS for SMEs supporting module 11: impairment and reversals.

Reconcile gross receivables, the allowance and the net balance

Hypothetical balances, in US$ thousands. Gross receivables are 100 and the allowance is 10, leaving 90 net.

The company writes off a receivable of 5 that was already fully covered by the allowance. Assume no other activity or change in loss estimates.

Gross receivables fall to 95 and the allowance falls to 5. Net receivables remain 90.

The allowance became smaller, but the write-off did not create an earnings benefit.

Compare that with a separate scenario in which gross receivables stay at 100 and new evidence supports reducing the allowance from 10 to 7. Net receivables rise from 90 to 93, with a reversal of 3 under the assumed applicable accounting treatment.

The IFRS for SMEs teaching module distinguishes impairment reversals from write-offs. Reconcile the movement and its evidence before judging a smaller allowance.