Sound Practices for Loan Accounting and Disclosure

July 1999

Note: This document has been superseded by Sound credit risk assessment and valuation for loans, June 2006.

Executive summary

This document provides guidance to banks and banking supervisors on recognition and measurement of loans, establishment of loan loss allowances, credit risk disclosure and related matters. It sets out banking supervisors' views on sound loan accounting and disclosure practices for banks. The document also serves as a basic framework for supervisory evaluation of banks' policies and practices in these areas. It may also be helpful to accounting standard-setters.

Various international bodies, including the Basel Committee, have called for progress in accounting and disclosure practices for banks' lending business and related credit risk. Accounting treatments generally, and loan accounting treatments specifically, can significantly affect the accuracy of financial and supervisory reporting and related capital calculations. Moreover, sound accounting and disclosure practices are essential to ensure the enhanced transparency needed to facilitate the effective supervision and market discipline of financial institutions. In addition to the Basel Committee, the G7 Finance Ministers, G10 central bank Governors and international financial institutions such as the International Monetary Fund and the World Bank have called for progress in this area.

The paper begins by stating the overall objectives of the Basel Committee in addressing the topic of sound practices for loan accounting and disclosure. It summarises key terms and ties this guidance to the credit risk management process. The paper then provides guidance on sound practices with respect to key loan accounting issues, such as the initial recognition and measurement of loans, subsequent measurement of impaired loans, the establishment of loan loss allowances, and income recognition. Moreover, the paper presents sound disclosure practices focusing on the credit risk in the loan portfolio. The paper also includes a brief discussion of the role of supervisors in assessing a bank's management of asset quality and the adequacy of loan loss allowances.

Four primary concerns of supervisors regarding loan accounting and disclosure are a) the adequacy of an institution's process for determining allowances, b) the adequacy of the total allowance, c) the timely recognition of identified losses through either specific allowances or charge-offs and d) timely and accurate credit risk disclosures.

The publication of this paper is a component of the Committee's long-standing work to promote effective banking supervision and safe and sound banking systems. It complements the Basel Core Principles in the field of accounting and disclosure for banks' lending business and related credit risk. International implementation of the guidelines in this paper should help achieve enhanced bank accounting policies and practices, which are consistent with sound risk management practices, in both G10 and non-G10 countries, as well as increased convergence of such policies and practices across banks and countries.