Current Expected Credit Losses: A Trade Receivables Example

By Colin M. Hannifin, CPA, Business Assurance & Advisory Services Senior Manager

Current Expected Credit Losses: A Trade Receivables Example

Guidance on Measurement of Credit Losses on Financial Instruments

Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requires entities to recognize future expected credit losses, a significant change from previous guidance, in which losses were recognized when it was probable that they had been incurred.


This change, which will result in an acceleration of recognition of credit losses, has the most significant impact on financial institutions. But any entity that extends credit – even just typical 30-day payment terms to its customers – are required to apply the new standard. This article walks through how an entity may apply the new standard to trade accounts receivable using an aging-bucket methodology.


In the example below, the entity provides for customers to have payment terms of 30 days. The entity begins its assessment by determining the period over which it should evaluate its historical loss rate. The entity determines a historical period of year would provide the historical insight that is relevant to its current receivables. The entity then determines its historical loss rate; it does this by first evaluating its historical credit sales and how long they took to collect.

Figure 1

Current Expected Credit Losses Example 1 - Virginia CPA firm

Example 2 is assembled based on the historical financial data of the entity. During the historical period, they had total credit sales of $1,785,000, with total write-offs of $27,200. The table shows how quickly the trade receivables were collected. Based on this, the entity can calculate its historical credit loss rate based on reconstructed aging buckets.

Figure 2

Current Expected Credit Losses Example 2 - Virginia CPA firm

The entity believes the historical loss information is a reasonable basis on which to determine expected credit losses on the trade receivables held as of year-end as the make-up of the customers during the historical period is similar in nature to the customers at year-end. However, the entity applies current economic conditions to its calculated historical loss rates. Based on improving unemployment levels and availability of workers, the entity believes credit loss will be decreased by 10% across all aging bands.

Figure 3

Current Expected Credit Losses Example 3 - Virginia CPA firm

The entity applies the expected loss rate to its trade receivable aging schedule as of year-end. It rounds the total expected credit loss to avoid implying a level of precision that is not present.

Figure 4

Current Expected Credit Losses Example 4 - Virginia CPA firm

Based on the entity’s analysis, it records an allowance for credit losses in the amount of $31,000, recognizing credit loss expense for the same amount.

While the application of the new credit loss standard will have a significant impact, by developing strong processes during adoption, an entity can make it a routine part of its financial close process. The new standard is effective for 2023 calendar year-ends.

Questions on adoption of the new credit loss standard for your business? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000.

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About the Author


Colin M. Hannifin

Colin M. Hannifin, CPA, Business Assurance & Advisory Services Senior Manager

Colin is a Business Assurance & Advisory Services Senior Manager at Keiter. He has significant experience in public accounting for both the not-for-profit and private sectors. Colin’s clients rely on him for sound advice and insights on accounting regulations and changes that may impact their business.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

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