Doubtful debts provision (expected credit loss allowance)
What is a doubtful debts provision, and how does a lender read it?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A doubtful debts provision is the amount a business deducts from its trade receivables for debts it does not expect to collect. Under IFRS 9 and the Australian and New Zealand standards based on it, it is an expected credit loss allowance, often worked out from loss rates by age; under FRS 102, used by most UK mid-market groups, debts are provided for once there is evidence of a loss unless they have chosen IFRS 9, and many owner-managed businesses carry only specific provisions. A lender compares it with the overdue part of the aged debtors report: US$50,000 against US$400,000 more than ninety days old asks why so little.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// THE FULL PAGE
Doubtful Debts Provision: a Worked Example →
The ledger says what is owed. The provision says what will come.
// WHAT IT IS NOT
A loan loss provision is a bank's allowance against the loans it has made; a doubtful debts provision is a borrower's allowance against what its own customers owe it.
// WORKED IN
// NEXT TO IT
THE ACCOUNTS AND THE AUDIT FILE
- Going concern
- Management accounts
- Related-party transactions
- Capitalised costs
- Contingent liabilities
- Bank confirmation (audit)
- Qualified audit opinion
- Subsequent event
- Debt classification on a covenant breach
- Shareholder current account
- Contract assets (unbilled revenue)
- Right-of-use asset and lease liability (IFRS 16)
- Percentage-of-completion revenue (input and output methods)
- Customer prepayments (deferred income)
- Window dressing (period-end debt)
- Intercompany balances
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