Impairment of receivables to users of financial statements

Assignment Help Financial Management

Reference no: EM131923922

The following is an extract of an article that appeared in The Economic Observer Online on July 21, 2008:

"Chinese commercial banks have been told by the government to waive loan repayments for Sichuan earthquake victims who are now unable to settle their bills.

The China Banking Regulatory Commission (CBRC) issued a notice on May 23 demanding banks to write off credit extended earlier to quake victims as bad debt if the borrowers met the following criterions: suffered huge economic losses from the Sichuan earthquake and failed to be compensated by insurance; or despite insurance compensation still fell short of repaying debts. CRBC says the reclassification has a legal foundation with the Ruling on Bad Debts Management for Financial Institutions (revised 2008).

The CRBC notice’s stated objectives were to ease the suffering of quake victims and create conductive environment for rebuilding efforts. However, industry sources said it was akin to transferring the economic losses incurred by the May 12 earthquake to commercial banks.

At present, it is still unclear how much the banks will have to own up to; but based on research by the BOC International (China) Limited, the Chinese banking industry may suffer losses between five and 13 billion yuan from the earthquake, while some market research institutions believed the losses could run well over 20 billion yuan.

Questions:

• Explain the usefulness of the raising of an allowance for impairment of receivables to users of financial statements.

• Is the notice by the CBRC consistent with the measurement of receivables?

• Why do you think the CBRC would have issued this directive?

Reference no: EM131923922

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