Nonaccrual Experience Method (NAE)
Candlefocus EditorUnder this method, companies are not required to accrue income for bad or delinquent debts that it does not expect to be collected based on past experience. Instead, such bad debts that are not likely to be recovered can be written off without going through the normal accrual process.
This method is important because it prevents companies from over-accruing income for debts that are likely to remain uncollected. Without it, companies may be tempted to show a higher level of revenue than their actual performance and ultimately their financial position will reflect incorrectly.
The NAE Method also allows companies to separate expenses into two separate categories: those that have been written off and those that are still expected to be paid. This allows financiers and other stakeholders to more accurately evaluate the company’s financial status and health.
Overall, the NAE Method emphasizes the importance of being realistic about when a company will be able to collect payments on delinquent debts and helps to reduce the risk of over reporting revenue. It is especially important when it comes to improving the accuracy of financial statements and reflecting the true picture of a company’s actual performance.