What is the only thing harder than making a sale? Answer: Collecting the cash. Just ask a banker, virtually any banker. Bankers around the world have been awash in “doubtful” loans for years. And, it may be many years before the mess is finally cleaned up.
If your business sells most of its goods on credit or is in the business of making loans, then accurately recording your receivables is one of your most important accounting tasks. At the end of every accounting period, companies are required to estimate how many of their receivables are “uncollectible.” A significant decline in the amount of estimated doubtful loans can send a company’s share price soaring. For example, BNP Paribas (FRA) reported a decline in the estimated provision for doubtful loans of more than 50%. The market reacted very favorably, with the company’s share price rising by 5.3% in one day.
On the other hand, when a company announces an unexpected increase in its estimated doubtful loans, the securities market often reacts severely. For example, BBVA (ESP) announced that it was increasing its estimated provision for doubtful loans by €164 million. Its share price fell by 6% in a single day.
No bank is spared scrutiny of its estimated doubtful loans. In fact, it is likely that no number in a bank’s financial statements receives more careful investigation by financial analysts and investors. Nearly three years after the beginning ...