What’s going on? Well, the Generally Accepted Accounting Principles
(GAAP) in the U.S. is based on the “incurred loss” model. This framework
requires that before an allowance for loan loss is established, it must be
probable, based on events that have already occurred, that a lender will not be
able to collect principal and interest payments that are required under the
contractual terms of the loan. If the impairment event has not already occurred,
or if it is less than probable that a loss will be incurred, then at least in
theory, no allowance is established.
A New Accounting Model For Loan Loss Allowances
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