Provision for bad debt (hensættelse til tab)
Also known as bad debt provision, impairment, expected credit loss, ifrs 9, hensættelse til tab, nedskrivning, forventet kredittab
A provision for bad debt is the accounting reserve for the loss you expect on your receivables — before it has been realised.
In practice
The provision is an estimate of what you will not recover. It is typically built on the aged debtors ledger: the older the claim, the larger the share provided for.
For a CFO, the provision is one of the figures that hits the result directly. And it is one of the places where a better recovery process shows up on the bottom line immediately — not because the claims change, but because they get younger.
Where it commonly goes wrong
- Providing at a flat percentage without looking at the ageing. The estimate then misses the mark in both directions.