Receivables From Customers and Notes Receivable, net

Receivables from customers, net and notes receivable, net include a provision for bad debts, which reflects our best estimate of probable losses inherent in the receivables from customers and notes receivable. The Company provides for an allowance for doubtful accounts based on a specific-identification basis. The Company continually reviews its provision for bad debts. The allowance for doubtful accounts related to receivables from customers was $11.8 million and $4.9 million as of September 30, 2011 and 2010, respectively. The allowance for doubtful accounts related to notes receivable was $0.1 million and $114.3 million as of September 30, 2011 and 2010, respectively.

During the year ended September 30, 2011, the Company recorded bad debt expense, net of recoveries, of $4.5 million, including provision increases and direct write-offs of $8.2 million, offset by recoveries of $3.7 million. The provision increases during 2011 were primarily related to credit losses recognized on consigned gold transactions, within the C&RM segment, and a clearing customer deficit account within the CES segment. A portion of the loss on consigned gold related to a customer for which a partial provision was recorded during the fourth quarter of 2010. During 2011, negotiation efforts with the customer resulted in settlement of the loss in excess of the amount previously estimated and a charge to bad debt expense for the incremental uncollectible portion. During 2011, the Company recorded recoveries of $3.7 million of bad debt expense related to collection of a previous customer account deficit, within the C&RM segment, and collection following a settlement relating to a disputed trade, within the CES segment, that was “given-up” to FCStone, LLC during the quarter ended June 30, 2010 by another FCM, discussed further below.

During the year ended September 30, 2010, the Company recorded bad debt expense, net of recoveries, of $3.5 million, including provision increases and direct write-offs of $4.2 million, offset by recoveries of $0.7 million. The provision increases during 2010 included a recorded charge to bad debt expense of $2.3 million related to a disputed trade that was "given-up" to FCStone, LLC by another FCM for a customer that held an account with FCStone, LLC. Despite expressly informing the FCM that FCStone, LLC would not accept the "give-up" trade, the "give-up" trade was submitted through the electronic clearing process and erroneously cleared, generating a deficit in the customer's trading account. The customer lacked the financial capacity to cover the account deficit. Additionally, the Company recorded a $2.5 million charge to bad debt expense related to a Dubai customer to whom INTL Commodities DMCC had consigned gold.

As a result of the acquisition of FCStone, the Company acquired notes receivable of $133.7 million as of September 30, 2009 from certain customers and an introducing broker which arose from previous customer account deficits. At the time of the acquisition, the Company estimated collectability of these notes to be $16.7 million. During 2011, the Company recovered $15.6 million as partial payment against these notes, and charged off $111.5 million of note receivable which was fully reserved. Since the acquisition of FCStone, total recoveries from these customers and introducing broker through September 30, 2011 is $15.5 million, and remaining notes receivable related to these customer account deficits is $1.2 million. The Company expects to collect the remaining amounts from the introducing broker, by withholding commissions due on future revenues collected by the Company, although no assurance can be given as to the timing of collection.

Activity in the allowance for doubtful accounts and notes for the years ended September 30, 2011 and 2010 was as follows:



(in millions)	2011			2010
Balance, beginning of year	$	119.2		$	123.4
Provision for bad debts	7.2			2.3
Transfer in ⁽¹⁾	2.5			—
Deductions:
Charge-offs	(113.3		)	(5.8		)
Recoveries	(3.7		)	(0.7		)
Balance, end of year	$	11.9		$	119.2

(1)

During the three months ended December 31, 2010, certain open position derivative contracts, which had a $2.5 million credit reserve as of September 30, 2010 were closed, and the deficit account balance was reclassified from financial instruments owned to a receivable from customer. Accordingly, the previously established credit reserve amount was transferred into the allowance for doubtful accounts during the three months ended December 31, 2010.

Additionally, in the normal course of operations the Company accepts notes receivable under sale/repurchase agreements with customers whereby the customers sell certain commodity inventory and agree to repurchase the commodity inventory at a future date at either a fixed or floating rate. These transactions are short-term in nature, and are treated as secured borrowings rather than commodity inventory, purchases and sales in the Company’s consolidated financial statements. As of September 30, 2011 and 2010, the Company had outstanding notes receivable of $24.3 million and $13.6 million, respectively, related to this program.