Bank Loan Loss Accounting - Essay Example

RESEARCH PAPER, FINANCE AND ACCOUNTING BANK LOAN LOSS ACCOUNTING By Introduction It is important to highlight that this research paper delves in the discussion is on the proposed and suggested variations as well as changes in accounting standards for bank loan loss accounting. It can be noted that the paper has been divided into various segments: introduction, financial instruments, comment letters, Wharton Research Data Services (WRDS), Form 10-K and other Public Disclosures, SAP ERP, Conclusions, Reference, and wrapped with Appendices (Stephen, 2007). 1. Financial Instruments—Credit Losses (Subtopic 825-15) The proposed changes in accounting standards for credit losses Financial instrument are the devices that are used by a business organization on the measurement of the possibility of realizing profits and losses in any business transaction. In this therefore, profits arise when the value of the sales are greater that the value of cost of sales. Losses on the other hand are incurred when the cost of sales are more than the sales. Credit losses occur majorly when the business has offered assets to client on credit but there is a failure in payment from the customer (Benton, 2007). This could be attributed by several factors. Some of the factors include unworthy credit customer or even when the financial base of the customer is not stable. This can make the customer not to pay the credit offered. It is important to highlight that with the proposals that were made by the Financial Accounting Standards Board (FABS) will definitely alter the way banks encounter credit in terms of their accountability. One thing that can be noted is that the incorporation of the various models as seen in the current US GAAP delay the possibility of faster determination of risks or losses unit thy become certain. Below are therefore the proposed changes in the accounting standards for credit losses (Alain, and Giovanni, 2003) The proposal wanted an early recognition of the credit losses. The losses could be on the assets of an organization or the loans that are offered. This is quite different from the case that is use in the United States Generally Accepted Accenting Principles. Another proposal requires the banks and other financial institutions to conduct an assessment and monitor possible loss on all the assets whether fixed or current. 2. Wharton Research Data Services (WRDS) This is a web data storage and management system that has been designed for the students, scholars as a well as the business persons can access and then solicit resourceful information. These could be information on marketing activities, economics, commerce as well as financial matters (Patrich, 2003) The formulas that have been indicated below are quite effective in the determination of whether banks are efficiently managing the disclosed fair values: the latent variable model. LNSFV/LNSGBV = α0 + α1LNSIV/LNSGBV + α’x + ε1 To make it quite vivid: LNSFV is the disclosed fair value of loans that have been provided. This is a nutshell can be said as the total value of loans or credit that has been lent or that an organization is owed. That is the book value prior before the subtraction of the allowances that are offered to the loan losses. LNSIV is the value of the loan if it is to end or the current loan value. It can also be reiterated that this is the expectation in terms of the cash receivables as well as payables from the loan portfolio. All factors are put into consideration at that point of determining the loan value. X on the other hand is the vector for that monitors on the incentives or reduction on the costs of production that is incurred by the management. 1. The following are also applicable: LNSFV/LNSGBV = α0 + α1LNSIV/LNSGBV + α2ROA + α3CL+ α4GROWTH +α5T1CR + α6NLNS/TD+ α7LOGLNS + α8LOGTA + ε1 (1) 2. CEMV/LNSGBV = β0 + β1LNSIV/LNSGBV + β2(CNLIA × NLIA)/LNSGBV+ β3NLIA/LNSGBV + ε2 (2) 3. LNSIV/LNSGBV = γ0 + γ1RLNS + γ2NPL/LNSGBV + γ3CL + ε3 (3) 3. Form 10-K and other Public Disclosures Form 10-K has been loaded with more areas that need to be filled that are well highlighted below: i. Accountant’s report, which should be well organized, clearly dated and then verified and manually signed. The report should also have the name of the state or city where it was issued out. In the writing of the report all the financial transactions carried out in an accounting period should be well attached or shown. The report should be re-dated or dual dated in case there is an event that arose after the date of the initial report ten there is need for the making of adjustments to avoid errors during the editing process. There can as well be an omission in case the report had been previously presented by the auditors (Stephen, 2007). ii. Participation in “sanctionable activities” with Iran or Syria iii. Consent of Independent Registered Public Accounting Firm. 4. SAP ERP System Application Product (SAP) is computer software that traces its origin from a company in Germany. SAP ERP integrates all the constituent roles and duties in an organization. It is ranked as the fourth largest company in terms of the operation, coverage, resources as well as the customers (Jonathan and Delhaise, 2013). There 5 Reasons Why System Application Product (SAP) Is the Best Enterprise Resource Planning (ERP) System that most businesses use in the way to enhance fast insight, efficiency as well as flexibility in the method of operation. The following reasons therefore explain the popularity of use of SAP software by most businesses. SAP solutions can be measured and can quickly adapt with the advancement of technology in other areas of operation. The software I also compatible with the other computer applications that are being developed and this therefore gives the business operators a good advantage in their operations against the competitors. The wide use of this software can be seen by the implementation of the ERP solutions derived from the SAP by 1000 worlds’ leading companies (Andrew, 2004). The centre of focus by SAP is entrepreneurial application for the past decades. Other well-known ERP software sellers in many cases are general merchandisers, i.e. they tend to be diverse in the items that they sell rather than specialization. The products therefore are therefore sub-standard (International Monetary Fund, 2012). Another reason why SAP is widely used is that it tends to reduce the production costs, maximizing on the resources available through the continued focus on the ERP system. Every application that is developed by Sap meets every business operation which is quite ideal for the entrepreneurs. Every business person has the intention of going global and the applications support this (Viral,  Cooley, Richardson, and Ingo, 2010) The architecture of SAP is extremely strong with a process-centric orientation and a foundation that works in real time connection and communication with enterprise large business steps that is highly elastic and flexible (Johnson, 2004). For the past 30 years, SAP has been able to focus on the industry and business applications majorly. They have therefore made these real and authentic in operations. This is because there is the access to real and desired information at the time needed and these benefits have therefore made SAP to dominate the market (Luc, 2009). Advantages of ERP Gives room for universal integration and unity. The information presented is authentic and quite updated at the time it occurs or occurred. Updating of information is only done once but the implementation and adoption is done in the whole company Disadvantages of ERP There is high possibility of risk failure especially during the implementation process. It takes a lot of time to get profits from the returns from the investments made. It is not quite elastic and is also expensive. Conclusions What are the advantages and disadvantages of the proposed changes in accounting standards? The advantages of the proposed changes in the accounting standards The proposal can help in the prevention of the bad debts that the business and other financial institutions are likely to incur. The proposals are also ideal since there is the valuation of the asset at an early state and this can help in losing due to undervaluation. The disadvantages of the proposed changes in the accounting standards It may be subject to inaccuracy at some point especially if the value is higher than the expected value of the property. Reference Alain, L. and M. Giovanni, Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries, World Bank Publications, 2003 Andrew, F., Understanding International Bank Risk, John Wiley & Sons, 2004 Benton, E., Corporate Governance in Banking: A Global Perspective, Edward Elgar Publishing, 2007. International Monetary Fund, People s Republic of China: Detailed Assessment Report: Basel Core Principles for Effective Banking Supervision, International Monetary Fund, 2012. Johnson, W. Powerhouse Marketing Plans: Fourteen Outstanding Real-life Plans and what you can learn from them to Supercharge Your Own Campaigns, AMACOM Div. American Mgmt. Assn., 2004. Jonathan G., and P. Delhaise, The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors, John Wiley & Sons, 2013. Luc, L. Accounting Discretion of Banks During a Financial Crisis, International Monetary Fund,  Business & Economics, Sep 1, 2009. Patrich, H., Taxation of Financial Intermediation: Theory and Practice for Emerging Economies, Volume 235, World Bank Publications, 2003. Stephen, G. Financial Instruments and Institutions: Accounting and Disclosure Rules, John Wiley & Sons, Business & Economics, Jul 20,2007. Viral V., F. Cooley, P. Richardson, and Ingo W., Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, New York University Stern School of Business, John Wiley & Sons, 2010. APPENDICES 4. LNSFV/LNSGBV = α0 + α1LNSIV/LNSGBV + α’x + ε1 5. LNSFV/LNSGBV = α0 + α1LNSIV/LNSGBV + α2ROA + α3CL+ α4GROWTH +α5T1CR + α6NLNS/TD+ α7LOGLNS + α8LOGTA + ε1 (1) 6. CEMV/LNSGBV = β0 + β1LNSIV/LNSGBV + β2(CNLIA × NLIA)/LNSGBV+ β3NLIA/LNSGBV + ε2 (2) 7. LNSIV/LNSGBV = γ0 + γ1RLNS + γ2NPL/LNSGBV + γ3CL + ε3 (3) Where: LNSFV = disclosed fair value of loans LNSGBV = gross book value of loans LNSIV = intrinsic value of loans ROA = change in return on assets relative to the previous year CL = change in the rate of credit losses relative to the previous year GROWTH = rate of change in average total assets relative to the previous year RELIA T1CR = Tier 1 Capital Ratio NLNS = net loans TD = total deposits LOGLNS = log of gross book value of loans LOGTA = log of total assets CEMV = market value of common equity at fiscal year end NLIA = book value of liabilities and preferred stock minus assets other than loans CNLIA = cost of net liabilities RLNS = effective interest rate on loans NPL = nonperforming loans CL = rate of credit losses SAP development Read More