What is Allowance for Doubtful Accounts?
The allowance for doubtful accounts is a contra-asset account that reduces accounts receivable to the amount expected to be collected. Under IFRS 9, the allowance is forward-looking — based on expected credit losses (ECL), not just past defaults.
How It Works
- Stage 1 (12-month ECL): performing receivables
- Stage 2 (lifetime ECL): significant increase in credit risk since recognition
- Stage 3 (lifetime ECL): credit-impaired
- Provision matrix often used for trade receivables (simplified approach under IFRS 9)
- Changes in allowance hit the income statement as a credit-loss expense
Saudi Context
Saudi companies — especially in contracting and B2B services where receivable ageing is long — implement IFRS 9 ECL models tailored to Saudi credit history. SAMA-regulated banks have detailed ECL models for loan portfolios; SOCPA inspection reviews methodology for material exposures.
Example
A Saudi distributor has receivables of SAR 100M. Based on historical default and current outlook, its provision matrix assigns 1% to current, 5% to 30-60 days, 20% to 60-90 days, and 50% to >90 days. The blended allowance is SAR 6.4M, reducing receivables to SAR 93.6M on the balance sheet.