Last reviewed: July 2026.
A bad debt is a receivable that is no longer expected to be collected. Under IFRS 9, entities do not wait for a final default before recognising credit losses. They recognise expected credit losses (ECL) using reasonable and supportable historical, current and forward-looking information.
For trade receivables, entities commonly apply the simplified approach and recognise lifetime expected credit losses. A provision matrix based on ageing is one practical method, but rates must reflect the entity’s customers, experience and economic outlook.
Bad debt write-off versus ECL allowance
- ECL allowance: estimates expected losses on receivables that remain recognised.
- Write-off: removes the gross receivable when there is no reasonable expectation of recovery, subject to the entity’s evidence and policy.
A write-off can occur after an allowance has already been recognised. The write-off then reduces both the gross receivable and the allowance rather than creating the full expense again.
Simplified approach for trade receivables
The simplified approach measures lifetime ECL from initial recognition for qualifying trade receivables and contract assets. It avoids tracking changes in credit risk through the general three-stage model.
Lifetime ECL reflects cash shortfalls over the expected life, weighted by probabilities and discounted where required. It is not limited to invoices already overdue.
Provision matrix example
| Receivables ageing | Gross balance (CU) | Historical/adjusted loss rate | Lifetime ECL (CU) |
|---|---|---|---|
| Current | 400,000 | 1% | 4,000 |
| 1–30 days overdue | 120,000 | 3% | 3,600 |
| 31–60 days overdue | 50,000 | 10% | 5,000 |
| 61–90 days overdue | 20,000 | 30% | 6,000 |
| More than 90 days overdue | 10,000 | 70% | 7,000 |
| Total | 600,000 | — | 25,600 |
The total lifetime ECL is 25,600 CU. A typical entry is:
- Debit impairment loss 25,600 CU
- Credit loss allowance 25,600 CU
The receivables may be presented net of the allowance, while gross amounts and credit-risk information are maintained for reporting and control.
How to develop loss rates
- Group receivables by shared credit-risk characteristics.
- Calculate historical default or loss experience.
- Adjust for recoveries and write-offs consistently.
- Consider current customer and sector conditions.
- incorporate reasonable and supportable forward-looking information.
- Apply rates to the reporting-date balances.
- Review outcomes and recalibrate the model.
Segments may include geography, product, customer type, credit rating, collateral, invoice type or overdue status.
Forward-looking information
Historical rates may need adjustment for unemployment, interest rates, commodity prices, customer-sector stress or other relevant forecasts. IFRS 9 does not prescribe a mechanical formula or bright line. The model should reflect reasonable and supportable information available without inappropriate bias.
Document scenarios, weightings, data sources and management overlays.
Write-off indicators
Evidence can include bankruptcy, cessation of trading, failed legal recovery, confirmed inability to pay, or expiry of enforceable recovery rights. Write-off policy should be authorised and consistent, but collection activity may continue after accounting write-off where legally and economically appropriate.
Recoveries after write-off
Cash recovered after write-off is recognised according to the entity’s accounting policy and applicable requirements, commonly as a reversal or recovery of impairment loss rather than revenue from ordinary sales. Preserve the link to the original customer and write-off approval.
Worked write-off entry
A customer balance of 8,000 CU has a full allowance and is approved for write-off. The entry is:
- Debit loss allowance 8,000 CU
- Credit trade receivables 8,000 CU
If no allowance existed, the write-off would normally create an impairment expense. However, a sound ECL process should recognise expected losses before final write-off evidence in many cases.
Credit control and accounting controls
- approve customers and credit limits;
- monitor ageing, disputes and broken promises;
- separate sales incentives from credit approval;
- review large and concentrated exposures individually;
- reconcile the receivables ledger to the control account;
- approve write-offs independently;
- compare model estimates with actual defaults and recoveries.
Use the receivables collection period, sales ledger controls and control account reconciliation as related monitoring tools.
Presentation and disclosure
IFRS 7 requires disclosures enabling users to evaluate credit-risk exposure and how it is managed, including information about ECL methods, assumptions, changes in allowances and relevant concentrations. The detail depends on materiality and the instrument portfolio.
The old phrase “provision for doubtful debts” is still used in teaching and practice, but under IFRS 9 the recognised balance is an expected credit loss allowance. See the related doubtful debts article.
Common mistakes
- waiting until a customer is definitely insolvent;
- using historical loss rates without forward-looking adjustment;
- applying one rate to very different customer groups;
- double-counting expense when a fully provided balance is written off;
- ignoring contract assets or customer concentration;
- using optimistic overlays without evidence;
- failing to reconcile the ECL model to the ledger.
Individual assessment and portfolio assessment
Large, unusual or credit-impaired balances may require individual assessment rather than a standard matrix rate. Other receivables can be grouped into portfolios with similar risk characteristics. Avoid double-counting by ensuring individually assessed exposures are removed from the collective calculation.
Document how guarantees, collateral, credit insurance and expected recoveries affect cash shortfalls and whether they qualify for consideration under the applicable requirements.
Key takeaway
Bad-debt accounting under IFRS 9 is forward-looking. Recognise lifetime expected losses for qualifying trade receivables, update estimates for current and forecast conditions, and write off balances only when there is no reasonable expectation of recovery.
Official references: IFRS 9 Financial Instruments, IFRS Foundation ECL application guidance, and IFRS 7 Financial Instruments: Disclosures.