An allowance (provision) that is created by a bank or entity for potential impairment losses (that may arise from the loans and advances extended to its customers). On an ongoing basis, impairment allowance is created for the remaining financing period, considering the probability of the occurrence of the event of default. It reflects the management’s best estimate of credit losses that may arise over the course of a specific period of time (time-based net cash flow projections).

This allowance or provision is held on a balance sheet as a result of the raising of a charge against profit to account for impairment losses arising in a bank’s lending book. An impairment allowance may be created for an individual loan or a portfolio of loans.