Accounting Research On Loan Loss Provisions

With the continuous development of economic globalization and China’s marketeconomy, the financial industry in economic activities occupies an increasinglyimportant position. Commercial banks is an important part of the financial industry,and plays a key role on the development of economy and social stability. As financialinstitutions, commercial banks face a number of risks in the business activities, inwhich credit risk is the major one. Commercial banks are also accounting entity, andthe quality of accounting information should also reach a higher requirement. Loanloss provisions is the reserve for loan losses, which is both a key concern ofaccounting standards and an important line of defense against the risks of commercialbanks. The Ministry of Finance and the People’s Bank of China have put forward therelevant regulations on loan loss reserve."Accounting Standards for BusinessEnterprises" issued by the Ministry of Finance in2006raise the provision for loanloss reserve: the future discounted cash flow method, this method requires the loanloss provisions reserve loans in accordance with the difference between the presentvalue of expected future cash flows and book value. Compared with the prior use offive-category loan classification method, the future discounted cash flow method ismore scientific and reasonable. With China’s state-owned commercial banks as arepresentative of the listed banks, they began to follow this method for loan loss since2007.Based on the above background, this paper studies and describes loan lossprovisions of the commercial banks in China. Firstly, the paper sorts out thedevelopment process of China’s loan loss provisions standards according to the timeorder, and elaborate since1988loan loss provisioning process gradually become morerational. Besides, the paper summarizes the current and important rules of loan lossprovisions, and compares the similarities and differences between the various rules.After elaborating on the historical development and the related regulations, this paperselects the2007-2011annual financial reports of the state-owned commercial banksas the case material, and case analysis is conducted on the specific circumstances ofthe loan loss provisions. This article has compiled related contents of loan lossprovisioning from financial reports, and does horizontal and vertical comparative analysis mainly from provision disclosure, provision method and provision amountusing tables and graphics. Through the analysis, the paper reveals some problemsabout the reserve of our state-owned commercial banks’ loan loss provisions, such asincomplete disclosure, inconsistent methods, insufficient provision, and subjectiveappraisal. The recommendations on our state-owned commercial banks’ loan lossprovisioning are as follows:(1)Strengthening accounting information disclosure aboutloan loss provisions.(2)Full provision for loan loss reserve on the basis of theprinciple of prudence.(3)Coordinating the conflict between accounting standards andfinancial supervision.(4)Refining the future discounted cash flow method andunifying portfolio assessment method.This article is based on China’s five state-owned commercial banks’ annualreports from2007to2011, and covers the changes in loan loss provisions since theimplementation of the new accounting standards. In addition, this paper focuses onthe analysis of the2011financial report information, so that the results reflect thecurrent actual situation of the banks. The main innovations of this paper are:comparing "migration model" and "roll rate model" of portfolio assessment, analyzingthe characteristics of the two models; using higher amount between the results of thefuture discounted cash flow method and the results of five-category loan classificationmethod as the loan loss provision results.