Allowance for Impairment of Trade Receivables (HUAL)

Understanding HUAL:

The HUAL formula helps determine the adjustment needed for the Allowance for Impairment (AFI):

• H (Have): Opening balance of AFI.
• U (Use): Specific bad debts written off during the period using the AFI.
• A (Adjust): The Impairment Loss (or Reversal) for the period needed to reach 'L'. This is the figure for the Statement of Financial Performance.
• L (Left): Desired ending balance of AFI (usually a % of closing Trade Receivables). This is the figure for the Statement of Financial Position.

Writing Off Bad Debts:

When a specific debt is written off, the journal entry is Dr Allowance for Impairment of TR, Cr Trade Receivables. This uses up part of the existing allowance (U in HUAL). It does not directly create an Impairment Loss expense at the time of write-off. For why AFI decreases, visit: masterpoa.com/afi

Year-End Estimation:

The Impairment Loss (expense) or Reversal of Impairment Loss (negative expense) is calculated at year-end based on the HUAL adjustment ('A'). Ensure the date used for JEs and FS extracts reflects the financial year-end.

Reversal of Impairment Loss:

This is a unique negative expense (or other income) that arises if the existing allowance (H-U) is more than the desired ending allowance (L). The JE is Dr Allowance for Impairment of TR, Cr Reversal of Impairment Loss on TR.