Receivables From Customers, Net and Notes Receivable, Net

Receivables from customers, net and notes receivable, net include an allowance for bad debts, which reflects the Company’s 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 allowance for bad debts. The allowance for doubtful accounts related to receivables from customers was $1.1 million and 0.9 million as of September 30, 2013 and 2012, respectively. The allowance for doubtful accounts related to notes receivable was $0.1 million as of September 30, 2013 and 2012.

During the year ended September 30, 2013, the Company recorded bad debt expense, net of recoveries, of $0.7 million, including provision increases of $0.2 million and direct write-offs of $0.6 million, offset by recoveries of $0.1 million. The provision increases during fiscal 2013 were primarily related to customer deficits in the C&RM segment, and the direct write-offs were primarily related to investment banking advisory services in the Securities segment.

During the year ended September 30, 2012, the Company recorded bad debt expense, net of recoveries, of $0.7 million, including provision increases of $0.5 million and direct write-offs of $0.3 million, offset by recoveries of $0.1 million. The provision increase during fiscal 2012 was primarily related to customer deficits in the C&RM segment. During fiscal 2012, the Company charged-off receivables on consigned gold transactions of $8.5 million and CES customer deficits of $2.7 million, which were all fully reserved.

During the year ended September 30, 2011, the Company recorded bad debt expense, net of recoveries, of $4.5 million, including provision increases of $6.8 million and direct write-offs of $1.4 million, offset by recoveries of $3.7 million. The provision increase during fiscal 2011 was primarily related to credit losses recognized on consigned gold transactions, in the C&RM segment, and a clearing customer deficit account in the CES segment. During fiscal 2011, the Company recovered $3.7 million of bad debt expense related to collection of a previous customer account deficit, in the C&RM segment, and collection following a settlement relating to a disputed trade, in the CES segment, that was “given-up” to FCStone, LLC during the quarter ended June 30, 2010 by another FCM. During fiscal 2011, the Company charged off $111.5 million of note receivable which was fully reserved. The remaining notes receivable related to these customer account deficits is $0.7 million, and 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, 2013, 2012 and 2011 was as follows:



(in millions)	2013		2012			2011
Balance, beginning of year	$	1.0	$	11.9		$	119.2
Provision for bad debts	0.2		0.4			7.2
Transfer in ⁽¹⁾	—		—			2.5
Deductions:
Charge-offs	—		(11.2		)	(113.3		)
Recoveries	—		(0.1		)	(3.7		)
Balance, end of year	$	1.2	$	1.0		$	11.9

(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.

The Company originates short-term notes receivable from customers with the outstanding balances being insured 90% to 98% by a third party, including accrued interest. The total balance outstanding under insured notes receivable was $21.1 million and $10.2 million as of September 30, 2013 and 2012, respectively. The Company has sold $18.7 million and $0.8 million of the insured portion of the notes through non-recourse participation agreements with other third parties as of September 30, 2013 and 2012, respectively.

See discussion of notes receivable related to commodity repurchase agreements in Note 14.