Bad debt occurs when credit sales are not collected as cash. Each industry has its own “normal” level of bad debt as a proportion of total credit sales. For banks, the allowance for bad debt is an account created to estimate the amount of a bank’s loan portfolio that will be ultimately uncollectible. It is also known as “loan-loss reserve”.

The Bloomberg article discusses the recent increase in bad loans at Italian banks. The amount of bad loans achieved its highest level in more than 12 years due to the deep and long recession. This is caused, primarily, because hundreds of small companies are forced to go out of business each day and families are struggling to repay their debts as unemployment rises.

Non-performing loans increased by 18% last year to $163.3 billion and it is expected that bad loans amount keeps rising until the economy starts to recover.

Sources: http://www.bloomberg.com/news/2013-03-19/italian-banks-bad-loan-ratio-rises-to-highest-in-12-years.html

It’s been a very hectic three years for retailers. Back in 2008, discretionary spending was down amid greater concerns of a failing economy. Target felt this uncertainty, as seen on their “bad debt expense.” As the retailer saw its third-quarter earnings fall a whopping 24%, it attributed the loss to a higher bad debt expense. Its annual reports stated that the figure, which estimates the amount of uncollectable write-offs it would encounter in the next period, increased about three-fold from 2007 to 2008. Posing a bedeviling problem, the bad debt expense seemed it would linger for as long as the industry-wide credit deterioration would.

It wasn’t until 2010 that Target would see the bad debt expense go down–by nearly 90%. After clearing out its cadre of not-so-receivable receivables, cardholders began to pay down their unpaid credit. This resulted in a decrease of bad debt expense from $138mil in 2009 to $15m in 2010.

Retail consultant at AT Kearny Laura Gurski also attributes the drop to retailers like Target now learning how to manage inventories and delay markdowns. By keeping their inventory priced higher for longer, Target, among other retailers, can retain higher margins. Obviously, the downside to that practice can be the price-sensitive customers who refuse to buy items not on sale.

Furthermore, relying on customer solvency (and therefore credit solvency) to rescue Target’s receivables was a risky move in and of itself. Had the consumer credit crisis lasted longer than it had, Target’s writeoffs would only be exacerbated. There simply cannot be enough said for the effect that the recovery in customer sentiment had on earnings, regardless of how well the firm manages their inventory.

Source:

http://media.corporate-ir.net/media_files/irol/65/65828/AP_Hi.pdf

http://ftalphaville.ft.com/2008/11/18/18331/more-us-retailers-report-grim-results/

http://www.ft.com/intl/cms/s/0/b2d837c4-c8e1-11e0-aed8-00144feabdc0.html#axzz2OIHY6KgV

This article talks about the changes to the LIFO Accounting method, which Obama Administration is considering.

The Obama administration has scoured the tax code looking for “loopholes” to close to generate more revenue. According to, The New York Times, Barack Obama describes the “last-in, first-out” rule of inventory accounting as “arcane”. However but it will be a critical problem for businesses if the decade-long tax rule gets changed.  Instead of using the last sale price of inventory as a cost basis to determine taxable profit, the elimination of the LIFO rule will create accounting headaches that will impact smaller businesses most.

The effect of the accounting change would be significant, and in pushing for it Mr. Obama has kicked a hornet’s nest. Lobbyists from companies of all sizes are swarming around Congress to kill the proposal, which would prohibit the use of an accounting technique known as last in, first out, or LIFO which is used to determine the cost of goods sold, and therefore the income earned, by a company.

By eliminating LIFO accounting technique, Obama Administration has projected to raise $65 billion to $95 billion over 10 years. This would increase the taxable income and tax liability of companies that have been using this method of accounting for decades. Small businesses, manufacturers, wholesalers, retailers and oil companies would be especially hard hit as a result of this change.

The president’s proposal would also undo the tax benefits that companies have obtained by using the LIFO method of accounting over the years. The government would tell companies that they must go back and recalculate the tax savings they have claimed for decades. The proposal requires that tax be paid on long-deferred gains with the provision that the tax could be paid over a period of 10 years.

In moving forward with this accounting change, the administration needs to consider the overall impact it will have on the businesses and indirectly on the US economy.

Rite Aid Turns a Corner

Rite aid posted its first quarterly profit in 5½ years, as shoppers filled more prescriptions and stuck around to buy more incidentals in renovated stores. Shares jumped 18%, or 19 cents, to $1.24 in recent trading as investors were cheered by the news. Rite Aid, which also offered an improved fiscal 2013 per-share earnings target, last reported a profitable quarter in summer 2007.

The company’s firmer footing can be attributed to several factors. Rite Aid has cut costs and refinanced billions of dollars in debt. Rite Aid’s results have also been bolstered by the retailer’s loyalty program rollout and store renovations under a new format that expands clinical pharmacy services and offers more health and wellness products. Rite Aid remodeled 114 stores during the latest quarter and has in total converted 687 locations into the new wellness format. Rite Aid’s results have also been helped by a jolt in the number of prescriptions the company filled at its stores after millions of customers transferred their prescriptions when Walgreen exited pharmacy-benefits manager Express Scripts Holding Co.’s network at the beginning of 2012.

For the quarter ended Dec. 1. 2012, Rite Aid reported a profit of $61.9 million, or seven cents a share, compared with a loss of $52 million, or six cents a share, a year earlier.

Since 2007 Rite aid has recorded net losses. Rite Aid, using LIFO method, hasn’t needed to pay tax or dividends, since they haven’t had net income for a while. However, investors were not happy about Rite Aid’s performance. Due to several reasons the article previously mentioned, Rite Aid restarted to record net income instead of net loss.

http://online.wsj.com/article/SB10001424127887324461604578191231912454290.html