Under FRS 102 Section 11, a trade debtor is written down only when there is objective evidence at the reporting date that a loss event has already happened, such as a customer in serious financial difficulty or in default. Losses that might happen in future, with no loss event yet, are not provided for. The impairment is the difference between the carrying amount and the cash you now expect to collect, discounted only where the debt is a financing arrangement.

Which debtors does the incurred loss model apply to?

Ordinary trade debtors are basic financial instruments within Section 11 of FRS 102. A sale on normal short credit is recognised at the undiscounted amount receivable, normally the invoice price (paragraph 11.13, example 2). At each reporting date a non interest bearing debt receivable within one year on normal business terms is measured at the undiscounted cash expected to be received, which paragraph 11.14(a)(ii) describes as net of impairment under paragraphs 11.21 to 11.26. The broader measurement rules for these instruments are covered in our guide to basic financial instruments under FRS 102.

The incurred loss model in paragraphs 11.21 to 11.26 applies to companies that use Sections 11 and 12 in full. Paragraph 11.2 also allows an accounting policy choice to apply the recognition and measurement provisions of IAS 39 or of IFRS 9 instead. A company choosing IFRS 9 moves to an expected loss model, which HMRC’s Corporate Finance Manual at CFM33220 notes will accelerate the recognition of impairment losses. This page deals with the default Section 11 model used by most UK private companies.

What counts as objective evidence of impairment?

Paragraph 11.21 requires an assessment at the end of each reporting period of whether there is objective evidence of impairment of financial assets held at cost or amortised cost. If there is, the loss goes to profit or loss immediately. Paragraph 11.22 lists observable data about loss events that count as objective evidence:

  • significant financial difficulty of the customer;
  • a breach of contract, such as a default or delinquency in payments;
  • the creditor granting a concession, for economic or legal reasons relating to the debtor’s financial difficulty, that it would not otherwise consider;
  • it becoming probable that the debtor will enter bankruptcy or other financial reorganisation;
  • observable data showing a measurable decrease in estimated future cash flows from a group of debtors since initial recognition, even though the decrease cannot yet be traced to individual balances, such as adverse national, local or industry conditions.

Paragraph 11.23 adds that significant adverse changes in the technological, market, economic or legal environment in which the debtor operates may also be evidence. The common thread is that something has already happened. A general sense that some customers may not pay next year is not enough on its own.

Should debtors be assessed one by one or as a group?

Paragraph 11.24 requires every individually significant financial asset to be assessed on its own. Other debtors can be assessed either individually or grouped by similar credit risk characteristics. In practice, a business with a large ledger of small balances often groups them by customer type or age, then looks for observable data that losses have already been incurred within each group, such as the business’s own collection history for balances of that age adjusted for conditions at the reporting date.

What a grouped assessment cannot be is a flat percentage applied to the whole ledger with no link to loss events. That approach looks like an expected loss reserve, which Section 11 does not permit, and HMRC’s guidance at BIM42701 says a general reserve calculated as a percentage of total debts or sales without regard to the circumstances of particular debtors should not be admitted as a deduction for unincorporated businesses.

How is the impairment loss measured?

For a debtor measured at amortised cost, paragraph 11.25(a) sets the loss as the carrying amount less the present value of estimated cash flows discounted at the asset’s original effective interest rate. For a normal trade debt with no interest and short credit terms, discounting has no practical effect, so the loss is simply the part of the balance you no longer expect to receive. Where a sale was made on extended credit, for example two years interest free, paragraph 11.13 treats it as a financing transaction measured at present value, and the impairment calculation must use the same original rate.

The write down can be made directly against the debtor or through an allowance account; paragraph 11.26 refers to both. Most bookkeeping systems use an allowance account so that the sales ledger still shows what the customer legally owes.

What evidence should support the figure?

Because the model depends on loss events, the working papers should show the event for each impaired balance and how the recoverable amount was estimated. Useful evidence includes:

  • an aged debtor listing at the reporting date, reconciled to the ledger;
  • cash received after the year end, which shows which overdue balances were in fact collectable;
  • insolvency notices, administrators’ reports and estimates of any dividend to creditors;
  • correspondence about disputes, payment plans or concessions granted because of the customer’s difficulty;
  • for grouped balances, the historic collection data used and why it reflects conditions at the reporting date.

Information received after the reporting date can be decisive. Paragraph 32.5(b)(i) gives the bankruptcy of a customer after the year end as an example of an adjusting event that usually confirms a loss existed at the reporting date. A customer who simply pays late but pays in full needs no impairment; HMRC’s guidance at BIM42710 makes a similar point for tax: where a customer is habitually a slow payer and there is no reason to think their financial position has changed, the length of time a debt has been outstanding is not on its own enough to treat it as doubtful.

What does a worked example look like?

Illustration only. A company has trade debtors of £200,000 at 31 March 2027, all on 30 day terms.

Balance Facts Impairment
Customer A, £12,000 Entered administration in May 2027; administrator expects to pay 10p in the pound £10,800
Customer B, £5,000 90 days overdue at the year end but paid in full in April 2027 Nil
Small balances over 120 days, £6,000 Company’s own records show about 30% of balances this old are never collected, and trading conditions are unchanged £1,800
Remaining ledger, £177,000 No evidence of any loss event Nil

The total impairment is £12,600. A director’s proposal to add a further 2% of the whole ledger “to be prudent” would not be supported by any loss event and should not be booked.

When can an impairment be reversed?

Paragraph 11.26 requires a reversal when the loss decreases in a later period and the decrease can be objectively related to an event after the impairment was recognised, such as an improvement in the debtor’s credit rating or an unexpected settlement. The reversal goes to profit or loss and cannot take the carrying amount above what it would have been had no impairment been recognised. If Customer A’s administrator later pays 30p in the pound, £2,400 of the impairment is reversed.

How does the tax treatment follow the accounts?

For companies, HMRC’s guidance at CFM41030 explains that an impairment loss on a trade debt is dealt with under the loan relationship rules, and CFM33220 confirms that a debit correctly arrived at under the relevant accounting standard is allowable, as is a reversal taxable, whether the company uses an incurred loss or an expected loss model. The main exception is a debt between connected companies, where relief is normally not available. For sole traders and partnerships, BIM42701 allows a deduction for a bad debt and for a doubtful debt to the extent it is estimated to be bad, with the amount reserved in the books as a useful starting point if it is based on a separate valuation of each debt. The bookkeeping entries, VAT bad debt relief and write offs are covered in our guide to bad debts in the accounts and for tax.

What mistakes come up most often?

  • Carrying forward last year’s general provision without checking whether any loss event supports it.
  • Ignoring post year end evidence, either receipts that show a debt was good or insolvencies that show it was not.
  • Treating a disputed invoice as a credit loss when the real issue is that revenue should not have been recognised; that belongs in the revenue figures, not in impairment.
  • Impairing balances owed by group companies or directors without considering the connected party tax rules and the related party disclosures.
  • Failing to explain a significant estimate; where the impairment involves judgement, the disclosure requirements in accounting policies, estimates and errors may apply.

For impairment of non financial assets such as equipment or goodwill, Section 27 applies instead; see impairment of assets under FRS 102.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.