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The non-recognition of provisions for loan losses in the 1993 SNA and the recording of such provisions in the MFSM as "Other Accounts Payable" have always created a problem for bank supervisors who treat these provisions differently, i.e., as a deduction to gross loans (contra-asset account) in the balance sheets of banks. Total Assets and Total Liabilities of the banking system compiled by Research Departments are always overstated compared with the figures used by Supervision Departments for analysis purposes. A major aspect of supervision work is that of determining the quality of loans and other assets, and recommending additional provisions for loan losses when necessary. Such recommended additional provisions are deducted against the banks' capital position and may result in bank closures if the capital after adjustment falls in the negative territory (insolvency).
Both IAS 39 and the Basel Sound Practices for Loan Accounting require that impairment in loan values (provisions) be recognized in the books of the reporting entity. Even tax authorities do allow deduction of specific provisions for tax purposes. And if bank supervisors can close banks on the basis of capital adjustments arising from additional provisions, should SNA continue to ignore such impairment in loan values? MFSM's treatment of provisions as Accounts Payable is also unacceptable because these provisions do not constitute liabilities to anybody.
Carmencita C Santos
Advisor, Banking Supervision
IMF Technical Assistance, Bank of Uganda