Valuation of receivables in a company

The valuation of receivables is generally based on their nominal value. However, an adjustment for impairment (bad debt provision) or a value correction may need to be made.

Valuation of Receivables

In valuing receivables, various risks must be considered. One example is the receipt of payment. If there are concerns about a customer's payment difficulties or even a suspected imminent default, this must be taken into account by the company. Analysing payment terms, the structure by due date, or the segmentation by country groups enables a company to assess existing risks. Based on these insights, an adjustment for impairment may need to be made.

Warranty: Due to faulty deliveries or quality defects, an obligation to rectify may arise. This results in costs for the company that must be considered. It can either lead to provisions for additional services to be provided or necessitate an adjustment for impairment on receivables.

Currency fluctuations must also be considered. Receivables in foreign currency must be converted into the currency relevant for accounting purposes on the balance sheet date. Hedging transactions for currency risks must also be considered.

The value corrections are referred to as value adjustments. Usually, the correction is made indirectly. This means that the original receivable is not reduced, but the value correction is accounted for through an item with a negative balance.

Individual and Collective Valuation

In adjusting for impairment due to doubts about the creditworthiness of a debtor and for currency corrections, an individual valuation is performed. This means that each affected receivable is analyzed. The general risk of default is addressed through collective valuation. A collective adjustment for impairment is made. This is referred to as a bad debt provision.