1. What Is Expected Credit Loss?

Expected Credit Loss (ECL) is a forward-looking impairment model introduced under IFRS 9 accounting standards. It requires financial institutions to recognize expected credit losses at the time financial instruments are initially recognized and throughout their lifetime.

2. How Does The Calculator Work?

The calculator uses the ECL formula:

Where:

• \( PD \) — Probability of Default (%)
• \( LGD \) — Loss Given Default (%)
• \( EAD \) — Exposure at Default (currency)

Explanation: The ECL model estimates potential credit losses by considering the likelihood of default, the potential loss amount if default occurs, and the exposure amount at the time of default.

3. Importance Of ECL Calculation

Details: ECL calculation is crucial for financial institutions to maintain adequate provisions for potential credit losses, comply with IFRS 9 requirements, and make informed lending decisions based on expected risk.

4. Using The Calculator

Tips: Enter PD as percentage (0-100%), LGD as percentage (0-100%), and EAD in currency units. All values must be non-negative and within valid ranges.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between ECL and incurred loss models?
A: ECL is forward-looking and recognizes losses before they occur, while incurred loss models only recognize losses after there is objective evidence of impairment.

Q2: How is PD typically calculated?
A: PD can be calculated using historical default rates, credit scoring models, external ratings, or statistical models based on borrower characteristics and economic conditions.

Q3: What factors affect LGD?
A: LGD is influenced by collateral quality, recovery rates, seniority of the claim, and economic conditions during the recovery process.

Q4: When should EAD be measured?
A: EAD should reflect the amount at risk at the time of default, considering drawn amounts, undrawn commitments, and potential future exposures.

Q5: Are there different ECL approaches under IFRS 9?
A: Yes, IFRS 9 distinguishes between Stage 1 (12-month ECL), Stage 2 (lifetime ECL without credit deterioration), and Stage 3 (lifetime ECL with credit deterioration).