Trade receivable loss allowance: what to charge and when to write off
A year-end ageing report shows £100,000 owed by customers, with £40,000 past its due date. It tells the credit controller whom to chase. It does not tell the accounts what those receivables are worth. Under UK-adopted IFRS 9, ordinary short-term trade receivables carry a loss allowance for lifetime expected credit losses, and the ageing is evidence for that estimate. Profit or loss takes only the change needed to bring the allowance to its required amount. Writing a debt off is a separate entry that changes different balances.
Which receivables use the lifetime estimate
IFRS 9 paragraph 5.5.15 requires a lifetime expected credit loss allowance for trade receivables arising under IFRS 15 that do not contain a significant financing component, including those where the IFRS 15 paragraph 63 practical expedient applies. Where a significant financing component does exist, paragraph 5.5.15(a)(ii) allows an accounting policy choice to measure the allowance at lifetime expected credit losses, and paragraph 5.5.16 permits that choice to be made independently for trade receivables, lease receivables and contract assets, so this simplified route is not universal. This article covers UK-adopted IFRS, not FRS 102 or US GAAP.
The estimate is probability-weighted, reflects the time value of money and uses reasonable and supportable information about past events, current conditions and forecasts. A provision matrix built on ageing bands is an accepted practical method, but historical loss rates need adjusting for current and forecast conditions, and customers belong in groups that share credit risk characteristics (paragraphs 5.5.17 to 5.5.18, B5.5.35 and B5.5.49 to B5.5.52). The standard prescribes no percentage for any ageing band.
Sources and context, checked :
Book the movement, not the total
This example is hypothetical. Amounts are in pounds, the receivables are short-term with no significant financing component, time value effects are immaterial and no balance has been assessed individually. The loss rates are illustrative and assumed to be already adjusted for current and forecast evidence.
The required allowance is £60,000 × 1% + £25,000 × 3% + £15,000 × 10% = £2,850. Before this adjustment, the current allowance ledger holds a credit balance of £2,100, after any write-offs and other movements already posted. Paragraph 5.5.8 recognises in profit or loss the amount needed to adjust the allowance to its required reporting-date figure, so the charge is £750:
Dr impairment loss on trade receivables £750; Cr loss allowance £750.
Booking another £2,850 would leave an allowance of £4,950 against a requirement of £2,850 and overstate the expense by £2,100. After the correct entry, the balance sheet shows gross receivables of £100,000 less an allowance of £2,850, a net carrying amount of £97,150.
The allowance is an accounting estimate. It is not cash set aside and not a credit note. Customers still owe the full £100,000, and collection carries on.
| Group | Gross receivables | Illustrative lifetime loss rate | Allowance |
|---|---|---|---|
| Not overdue | £60,000 | 1% | £600 |
| 1 to 30 days overdue | £25,000 | 3% | £750 |
| 31 to 90 days overdue | £15,000 | 10% | £1,500 |
| Total | £100,000 | £2,850 |
Sources and context, checked :
A write-off changes different balances
Take a separate case. A £1,000 receivable already carries a £1,000 allowance, and the business has no reasonable expectation of recovering any of it. Paragraph 5.4.4 reduces the gross carrying amount directly when there is no reasonable expectation of recovering a financial asset in its entirety or a portion of it, and treats the write-off as a derecognition event.
Dr loss allowance £1,000; Cr trade receivables £1,000.
Gross receivables and the allowance fall together. The net carrying amount does not move, and there is no second £1,000 expense, because the loss was recognised when the allowance was built. The remaining receivables are then measured on their own evidence.
Neither a number of days overdue nor a matrix percentage triggers a write-off by itself. The test is the evidence about recovery, and the approval belongs on file. VAT bad debt relief has its own conditions, so no tax claim follows automatically from either entry.
Sources and context, checked :
What to keep with the journal
Our suggestion is a short file for each reporting date: the ageing report reconciled to the receivables control account, the loss history used and the period it covers, the reasoning behind each adjustment for current and forecast conditions, how customers were grouped, any balances assessed individually and removed from the matrix, and the approved journal. If time value is material for any group, show how it was reflected. For each write-off, keep the recovery evidence and the approval.
At the next close, put the current allowance ledger balance, after write-offs and other movements already posted, beside this period's required figure before posting the adjustment. The journal is the difference between them.