Accounting technology / Glossary / Bad debt provision

What is a bad debt provision?

Definition

A bad debt provision is an estimate of the amounts customers owe that will not be collected, deducted from receivables in the balance sheet and charged as an expense. Under IFRS 9 and, in the US, the CECL model in ASC 326, it reflects expected credit losses, so it is booked before any specific customer fails to pay.

Also calledallowance for doubtful accountsloss allowanceexpected credit loss provision

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IFRS: IFRS 9 expected credit losses
US GAAP: ASC 326 (CECL)
Common method: Provision matrix by age

How a bad debt provision is set

Most companies use a provision matrix: receivables are grouped by age band, and often by customer type or region, and each band is given a loss rate based on past write-offs, adjusted for current conditions and the outlook. IFRS 9 lets companies always measure the allowance on trade receivables at lifetime expected credit losses, the simplified approach most use. In the US, the current expected credit loss model in ASC 326 applies to trade receivables for every company reporting under US GAAP. ASU 2025-05 adds an optional practical expedient for current receivables and contract assets, letting companies assume conditions at the balance sheet date do not change, effective for fiscal years beginning after 15 December 2025. A write-off removes a specific invoice once it is known to be uncollectable, using the provision. Aged debt data from ledgers and receivables tools feeds the calculation.

Common questions

What is the difference between a bad debt provision and a write-off?+

A provision is an estimate of losses across receivables that are still being collected. A write-off removes a specific invoice that will not be paid, normally charged against the provision already made.

What is a provision matrix?+

A table of expected loss rates by age band and customer group, built from historical losses and adjusted for current and expected conditions. Multiplying each band's balance by its rate gives the provision.

Does IFRS 9 apply to trade receivables?+

Yes. IFRS 9 requires the loss allowance on trade receivables and contract assets without a significant financing component to be measured at lifetime expected credit losses, which in practice means a provision from the day the invoice is raised.