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By recording a PCL as an expense on its profit and loss statements, a company acknowledges the possibility of bad debt. Read more in the MoneySense Glossary.
Provision for credit losses (PCL) is an amount companies charge against income to recognize bad debt. Recording a PCL reduces earnings by creating an expense.
Provision for credit losses contrasts with the allowance for credit losses (ACL), a balance-sheet item that provides management’s estimate of bad debt for their overall loan portfolio, based on the economy, interest rates, customer-specific information and other factors.
ACL is a contra-asset, subtracted from the company’s loan portfolio to provide a more accurate estimate of its true recoverable value. When provisions for credit losses are recorded, they are added to the allowance for credit losses.
Example: “When the economy weakens, banks usually report higher provisions for credit losses (PCLs), as their customers have greater difficulty paying off loans. Increases in PCLs reduce banks’ earnings.”
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