Purpose

This study aims to develop a high-quality impairment loss allowance model in conformity with Indonesian Financial Accounting Standards 71 (PSAK 71) that has significant contribution to national interests and the banking industry.

Design/methodology/approach

The determination of the impairment loss allowance model is settled through 7 stages, using integration of some statistical methods such as Markov chain, exponential smoothing, time series analysis of behavioral inherent trends of probability of default, tail conditional expectation and Monte Carlo simulation.

Findings

The model which is developed by the authors is proven to be a high-quality and reliable model. By using the model, it can be shown that the implementation of the expected credit losses model on Indonesian Financial Accounting Standards 71 is more prudent than the implementation of the incurred loss model on Indonesian Financial Accounting Standards 55.

Research limitations/implications

Determination of defaults was based on days past due, and the analysis in this study did not touch the aspects of hedge accounting in general.

Practical implications

This developed model will contribute significantly to national interests as a source of reference for other banks operating in Indonesia in calculating impairment loss allowance (CKPN) and can be used by the Financial Services Authority of Indonesia (OJK) as a guideline in assessing the formation of impairment loss allowance for banks operating in Indonesia.

Originality/value

As so far there is not yet an available standardized model for calculating impairment loss allowance on the basis of Indonesian Financial Accounting Standards 71, the model developed by the authors will be a new breakthrough in Indonesia.