Bad debt expenses, asset write downs, and loan-loss provisions are treated differently in corporate financial accounting than in estimating profits from current production in the national income and product accounts (NIPAs). In the national accounts, bad debt expenses and asset write downs are treated as capital losses that reduce the value of corporate assets on the balance sheet rather than as current-period expenses that lower profits. Similarly, loan-loss provisions – which are allowances set aside to cover nonperforming loans – are not deducted as expenses in the national accounts because they represent a set-aside for future losses rather than payment for current operating expenses.
In the national accounts, bad debt expenses are treated as changes in corporate assets rather than expenses from current production. As a result, they are not deducted as an expense in calculating NIPA corporate profits. Similarly, asset write downs are treated as capital losses in the NIPAs; that is, they are not deducted in the calculations of NIPA corporate profits because gains or losses on the sales of fixed assets and securities are not considered to be income from current production. Loan-loss provisions are not deducted as expenses in the calculation of NIPA corporate profits because they are not considered to be an expense from current production. Note, however, that the quarterly profits estimates are based on source data that do not always separately identify bad-debt expenses, asset write-downs, and loan-loss provisions, so the estimates of these adjustments may be incomplete.
As a result of these treatments, profits estimates based on corporate financial accounting can differ markedly from estimates of NIPA corporate profits, and tend to be lower than NIPA corporate profits during periods when corporations report unusually large bad debt expenses, asset write downs, or loan-loss provisions.
For additional information on the differences between profits estimates based on corporate financial accounting and those based on NIPA accounting, see pages 12 and 27 of the corporate profits methodology at the following link: http://www.bea.gov/scb/pdf/national/nipa/methpap/methpap2.pdf.