What is Bad Debt Provision?
A bad debt provision (allowance for doubtful debts) is an estimated reduction of trade receivables to their expected recoverable amount, recognized under IFRS 9 using a forward-looking expected credit loss (ECL) model.
How It Works
- Stage 1: 12-month ECL for performing receivables.
- Stage 2: lifetime ECL for receivables with significant credit risk increase.
- Stage 3: lifetime ECL for credit-impaired receivables.
- Most SMEs use the simplified approach: lifetime ECL on all receivables via a provision matrix.
Saudi Context
Saudi banks, finance companies, and large corporates have applied IFRS 9 expected credit losses since 2018. SAMA-regulated banks must use sophisticated probability-of-default models, while Saudi SMEs typically use a provision matrix based on aged receivables (e.g., 1% for current, 5% for 30-60 days, 20% for 60-90 days, 100% for >180 days).
Example
A Saudi distributor has SAR 5,000,000 in receivables. Provision matrix: 1% current (SAR 30,000), 5% 30-90 days (SAR 75,000), 50% 90-180 days (SAR 100,000), 100% >180 days (SAR 50,000). Total bad debt provision = SAR 255,000.