expected losses is still under discussion. Second, the impairment requirement and timing of recognition would differ according to the degree of credit risk deterioration. The full amount of remaining lifetime expected losses should be recognized immediately for those assets for which information is available that suggests that credit losses are expected to occur—or have occurred, on those individual assets or assets that are affected by events that indicate a direct relationship to possible future defaults (even if the specific assets in danger of default have not yet been identified). For assets evaluated collectively in a portfolio that do not meet the above criteria, provisions should be made to cover expected losses in the next 12 months, based on initial expectations plus the full amount of any changes in expected credit losses. This would improve early recognition of losses compared to the incurred loss model. Nonetheless, potential operational complexities remain to be dealt with, including the categorization of assets for impairment purpose and the catch-up adjustments due to changing expectations for the latter category in the context of open portfolios.

Despite the sound economic rationale of an expected loss model, many developing countries may face challenges in implementing it. As more than 100 countries around the world have adopted the IFRS or are in the process of doing so, what the IASB is now proposing will have broad implications for financial reporting in many developing countries. Although the IASB has yet to publish detailed rules on the measurement of expected losses,<sup>28</sup> concerns have already arisen about potential operational challenges, even in developed countries. Most banks in developing countries lack data on historical losses, let alone the capacity to estimate forward-looking expected losses. Regulators in some countries may consider providing standard risk parameters by types of exposures instead of relying on banks‘ internal models. Depending on the severity of data and risk management capacity constraints, different levels of simplification of the IASB rule may be considered.

Mexico, for example, has recently introduced a type of expected loss provisioning for credit card debt, mortgages, and non-revolving consumer credit, incorporating system-wide estimations of probability of default (PD), loss given default (LGD), and exposure at default (EAD).<sup>29</sup> The model estimates system-wide PD for a certain type of portfolio in the next 12 months, which is consistent with the timeframe specified under the IRB approach of Basel II for capital requirement calculation. The provisioning requirement based on such a model would ensure a floor on provisioning—that is, the expected losses in the next 12 months—but does not consider expected losses over the life of a portfolio, as is required in the joint IASB/FASB proposal. Nonetheless, the regulatory approach with a system-wide view may help mitigate concerns about banks‘ internal risk management capacity. In addition, this approach better utilizes all available

> 28 At the time of this writing, a range of options is under debate on the measurement of expected losses, including expected value (probability-weighted possible outcomes), most likely outcome, the maximum amount that is more likely to occur than not, and whether to use discounted or undiscounted amounts.

> 29 For a detailed methodology and estimation using information on credit card portfolios of Mexican banks, see Elizondo Flores and others (2010).

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