Controversy in contracts with installment plans: financial and accounting approaches to early termination assessments

It often happens that during the life of an instalment contract, the early termination must be addressed. In particular, due to the default of user, several controversies may emerge in the absence of a specific doctrine, as it happens in the Italian legislation (see, e.g., Hull, 1982; Lease et al., 1990). In this paper, some of the most critical contractual issues arising in the Italian legislative context are considered that turn out to be on the border between law and financial calculus and that may, in certain circumstances, generate controversies especially in the evaluation of the customer’s credits (Carretta, 2004; Peccati, 1986). Moreover, since the local Generally Accepted Accounting Principles request the company to account for the expected provisions for specific risks, the calculation and assessment of the components customer’s credits are not only necessary for the precise quantification of the credit in judicial question, but also from the point of view of financial accounting and reporting (see, e.g., Van Horne, 2009). In this regard, it is hence proposed to carry out the valuation of a customer’s credit using a financial model proposed by Peccati L. (1986), that suggests to split up the lump-sum credit in three components: outstanding debt, claim for damages and penalty. Therefore, the aim of the present paper is intended to stress the relation between the proposed financial model and the necessities of a clear and transparent accounting and reporting, and the opportunity to reduce the gap in assessments of the debt of early termination of instalment contracts.