In reality, financial results do objectively worsen in an economic downturn in a way similar to the rise in unemployment rates. Therefore applying an impairment model based on expected losses is arguably a faithful representation of current conditions. The IASB, Financial Accounting Standards Board (FASB) as well as the BCBS are actively engaged in finding a solution to this complex problem.
In this context, the expected loss based provisioning approach is a topic of significant interest for the global financial markets. Even when banks and accountants were making incurred loss based provisioning for identified losses, called “specific” provisions, they also voluntarily did make some sort of “general” provisions or “floating” provisions.