Allowance for doubtful debts: an expense with no cash going out

An allowance for doubtful debts reduces the carrying amount of accounts receivable by the portion the company no longer expects to collect. No money actually leaves the business: the expense is recognised in the income statement, and the "accounts receivable" line on the asset side of the balance sheet shrinks. For an analyst this means something simple: the company's profit falls before the debt is formally written off as uncollectible, and a later release of the allowance lifts profit without a single rouble coming in. Both movements are not operating events but estimates.

What the allowance does technically

A debt is considered doubtful if it has not been repaid by the date set in the contract and is not secured by a pledge, a surety or a bank guarantee. Security is crucial here: as long as there is collateral, the company still has a source of recovery and no reason to revalue the debt.

The mechanics work like this. At the reporting date the company takes an inventory of its settlements with counterparties, assesses the probability of non-payment on each debt and books the allowance. The allowance is a contra account to receivables: on the balance sheet, receivables are shown net of it. When a debt is finally recognised as uncollectible — the limitation period has expired, the debtor has been liquidated, or the bailiff has returned the writ of execution — it is written off against the accumulated allowance, and profit takes no hit at that point. If the debtor unexpectedly pays, the allowance is released through other income.

This leads to a conclusion that is easy to miss: the allowance does not create a loss, it shifts it in time — closer to the moment when it became clear the debt had gone bad, rather than when the legal formalities were completed.

The accounting allowance is an obligation, the tax allowance is an option

In financial accounting, every entity that keeps its books under the general regime is required to create an allowance for doubtful debts. It is an accounting estimate, and its size is determined by professional judgement: the payment discipline of the specific counterparty, its financial condition, how long the debt has been overdue, and the prospects in court. There is no single formula, so two companies with identical receivables can carry noticeably different allowances — and that is legitimate variation, not an error.

In tax accounting it is the other way round. Creating an allowance is the company's right, set out in its accounting policy, but if the company uses it, the calculation is strictly formalised by Article 266 of the Russian Tax Code. Whether a debt enters the calculation depends on how long it has been overdue: a short delay gives no allowance at all, an intermediate period allows the debt to be included in part, and a long delay allows it in full. On top of this there is a cap: the total allowance may not exceed a set share of sales revenue for the period. Any unused balance is either carried forward to the next period or included in income. The amounts set aside are treated as non-operating expenses under Article 265 of the Russian Tax Code.

We deliberately do not reproduce the exact overdue thresholds or the revenue cap here — the editors do not put numerical values in the text; they should be checked in the current version of Article 266 of the Russian Tax Code, since they have changed over time.

How it differs from an allowance for expected credit losses

These are different constructs that are often confused. The allowance for doubtful debts is a tool for accounting for trade receivables: it responds to the fact of a payment being overdue, so it looks backwards. The allowance for expected credit losses is an IFRS model for financial assets; it estimates probable future losses before any delay appears, and it dominates bank reporting. That is why you look for the allowance for doubtful debts primarily at retailers, industrial companies, builders and service companies, and for credit loss allowances in the financial sector. The broader family of concepts is covered in our piece on provisions and reserves; with mandatory reserves, which banks hold at the Bank of Russia, the topic has nothing in common except the word.

How to read the allowance in a company's reports

For corporate analysis, what matters is not the absolute figures but the trend and the ratios.

Step 1 — compare growth in the allowance with growth in revenue and receivables. If the allowance is growing faster than sales, the company has either started shipping goods to weaker counterparties or its customers are running into difficulties.

Step 2 — look at the allowance as a share of receivables over several years. A sharp jump points to a problem with one specific large debtor; a gradual rise points to deterioration of the portfolio as a whole.

Step 3 — separate releases of the allowance from operating profit. A release is paper income. A reporting period whose profit is built on released allowances looks strong, but that result cannot be repeated. Yet that profit still feeds into valuation multiples: the 3,92 of any stock moves precisely because the numerator responds to the market price, while the denominator responds to accounting decisions like these.

Step 4 — reconcile with cash flow. In a cash flow statement prepared using the indirect method, the allowance charge is added back as a non-cash adjustment. A gap between profit and operating cash flow equal to the allowances is a sign that the deterioration in customer payments has not yet reached the cash balance.

A separate practical point: the allowance reduces net profit, and for many issuers it is net profit under RAS or IFRS that serves as the base for the dividend. A large allowance charge at year-end can cut the payout, which is worth keeping in mind when checking the

Before making a decision.

All of this is easier to verify against primary sources: issuers' financial statements are collected in the reports section, the publication schedule is in the events calendar, and the profile of a specific security such as SBER is available from the stocks section. Definitions of related concepts are in the glossary.

The editors do not have data on specific companies' allowances for this piece, so no numerical examples are given: they should be taken from the notes to the issuer's financial statements, which disclose the movement in the allowance over the period.