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Sound Practices for Loan Accounting, Credit Risk Disclosure and Related Matters

List of Sound Practices

    FOUNDATIONS FOR SOUND ACCOUNTING

  1. A bank should adopt a sound system for managing credit risk.
  2. Judgements by management relating to the recognition and measurement of impairment should be made in accordance with documented policies and procedures that reflect such principles as consistency and prudence.
  3. The selection and application of accounting policies and procedures should conform with fundamental accounting concepts.

    ACCOUNTING FOR LOANS

    Recognition, Discontinuing Recognition And Measurement

  4. A bank should recognise a loan, whether originated or purchased, in its balance sheet when the bank becomes a party to the contractual provisions that comprise the loan.
  5. A bank should remove a loan (or a portion of a loan) from its balance sheet when the bank realises the rights to benefits specified in the contract, the rights expire or the bank surrenders or otherwise loses control of the contractual rights that comprise the loan (or a portion of the loan).
  6. A bank should measure a loan, initially, at cost, which is the fair value of the consideration given for it.

    Impairment - Recognition And Measurement

  7. A bank should identify and recognise impairment in a loan or a collectively assessed group of loans when it is probable that the bank will not be able to collect, or there is no longer reasonable assurance that the bank will collect, all amounts due according to the contractual terms of the loan agreement. The impairment should be recognised by reducing the carrying amount of the loan(s) through an allowance or charge-off and charging the income statement in the period in which the impairment occurs.
  8. A bank should measure an impaired loan at its estimated realisable value.

    Restructure Troubled Loans

  9. A bank should recognise a loan as a restructured troubled loan when the lender, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider.
  10. A bank should measure a restructured troubled loan by reducing its recorded investment to net realisable value, taking into account the cost of all concessions at the date of restructuring. The reduction in the recorded investment should be recorded as a charge to the income statement in the period in which the loan is restructured.

    Adequacy Of The Overall Allowance

  11. The aggregate amount of specific and general allowances should be adequate to absorb estimated credit losses associated with the loan portfolio.

    Income Recognition

  12. A bank should recognise interest income on an unimpaired loan on an accrual basis.
  13. When a loan is identified as impaired, a bank should either cease the accrual of interest or continue to accrue interest but set aside a specific allowance for the full amount of interest being accrued. Where an impaired loan is carried at the present value of expected future cash flows, interest may be accrued on the carrying amount and included in net income to reflect updated present values.

    PUBLIC DISCLOSURE

  14. A bank should disclose information about the accounting policies and methods followed to account for loans and the allowance for impairment.
  15. A bank should disclose information on methods used to determine specific and general allowances and key assumptions used.
  16. A bank should disclose information on the risk management and control policies and practices adopted by the bank relating to credit risk of the loan portfolio.
  17. A bank should disclose geographical information about loans, impaired loans and past due loans including the related amount of specific and general allowances.
  18. A bank should disclose balances of loans, impaired loans and past due loans by major categories of borrowers and the amounts of specific and general allowances established against each category.
  19. A bank should disclose information on significant concentrations of credit risk.
  20. A bank should disclose balances of loans where the accrual of interest in accordance with the terms of the original loan agreement has ceased because of a deterioration in credit quality.
  21. A bank should disclose a reconciliation of movements in the allowance for loan impairment ('continuity schedule') showing separately various types of allowances.
  22. A bank should disclose balances of and other information about loans that have been restructured during the year.
  23. A bank should disclose contractual obligations with respect to recourse arrangements and the expected losses under those arrangements.

    ROLE OF SUPERVISORS

  24. Banking supervisors should evaluate a bank's policies and practices for assessment of loan quality.
  25. Banking supervisors should be satisfied that the methods employed by a bank to calculate allowances produce a reasonable and appropriately conservative valuation in accordance with appropriate policies and procedures.

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