The normative framework of non-performing loans: regulatory and accounting issues

This article examines divergences in the definition of non-performing loans (NPLs) across countries, accounting regimes and firms. Currently no common definition of NPLs exists. From the point of view of setting standards, the divergence is manifested in several ways, not just across jurisdictions, across time and across entities, but also in the different priorities that accountants and regulators have. This article aims to shed light to the legal, accounting and regulatory aspects of loan classification and NPLs, topics that are multifaceted but have not been exhaustively addressed in the literature in an integrated fashion before. Since the 2007-09 global financial crisis, accounting bodies and prudential regulators have increasingly focussed on early recognition of credit losses and enhanced disclosure. In this view, a harmonized normative framework for loan classification is needed to address a regulatory gap since there is no consensus how to resolve NPLs across countries, firms or even within firms.