Expected credit losses

Foundations

• How to calculate ECL, step by step3 minute readHow to calculate ECL under IFRS 9 step by step: PD x LGD x EAD, marginal PDs, discounting, 12-month vs lifetime ECL, with a worked example and Excel model.
• Simplified approach vs general approach3 minute readThe IFRS 9 simplified approach vs general approach for ECL: which assets use each, lifetime ECL from day one vs three stages, and how a company applies both.
• Expected credit loss vs incurred loss3 minute readExpected credit loss vs incurred loss explained: why IFRS 9 replaced IAS 39, loss events, the too little, too late problem, and an example over three years.
• ECL glossary: the terms explained4 minute readAn ECL glossary: 26 expected credit loss terms explained in plain English, from PD, LGD and EAD to SICR, POCI, stage 2, overlays and write-offs.

Staging and SICR

• ECL stages 1, 2 and 3 explained3 minute readECL stages explained: what puts an asset in stage 1, stage 2 or stage 3 under IFRS 9, 12-month vs lifetime ECL, interest revenue and moving between stages.
• Significant increase in credit risk (SICR)3 minute readHow to assess a significant increase in credit risk (SICR) under IFRS 9: lifetime PD tests, relative and absolute thresholds and qualitative indicators.
• The 30 days past due backstop3 minute readThe 30 days past due backstop in IFRS 9: the rebuttable presumption of a significant increase in credit risk, when to rebut it, and the 90-day default rule.
• Credit-impaired assets and stage 33 minute readCredit-impaired financial assets under IFRS 9: what makes an asset stage 3, the definition of default, interest on the net amount, POCI and write-offs.

PD, LGD and EAD

• Probability of default (PD)3 minute readProbability of default (PD) for IFRS 9 ECL explained: 12-month and lifetime PD, point-in-time vs through-the-cycle, how PDs are estimated, with an example.
• Lifetime PD and the PD term structure3 minute readHow to build a lifetime PD and PD term structure for IFRS 9: conditional, marginal and cumulative PDs, survival, converting a curve, with an Excel example.
• PD from external credit ratings3 minute readHow to derive PD from external ratings for IFRS 9: cumulative default rates by grade, mapping unrated borrowers, point-in-time adjustments, with an example.
• Loss given default (LGD)3 minute readLoss given default (LGD) for IFRS 9 ECL explained: recovery rates, collateral haircuts, costs, discounting, workout LGD and forward-looking adjustments.
• Exposure at default (EAD)3 minute readExposure at default (EAD) for IFRS 9 ECL explained: amortising loans, prepayments, accrued interest, revolving facilities and the lifetime EAD profile.
• Credit conversion factors for undrawn commitments3 minute readCredit conversion factors (CCF) for ECL explained: EAD on undrawn loan commitments and revolving facilities, estimating CCF from history, and credit cards.

Provision matrices

• Calculating historical loss rates3 minute readHow to calculate historical loss rates for an IFRS 9 provision matrix: ageing cohorts, write-offs, recoveries, the period to use, with a worked example.
• Forward-looking adjustments to a provision matrix3 minute readHow to make a forward-looking adjustment to a provision matrix under IFRS 9: linking loss rates to GDP or other indicators, scalars, and a worked example.
• Segmenting receivables for a provision matrix3 minute readProvision matrix segmentation under IFRS 9: grouping receivables by shared credit risk characteristics, and why blended rates fail when the mix changes.
• Provision matrix mistakes auditors find3 minute readThe provision matrix mistakes auditors find most often under IFRS 9: zero loss rates on current balances, no forward-looking adjustment, bad data, and fixes.

Roll rates and migration

• Roll rate analysis for ECL3 minute readHow roll rate analysis works for ECL: monthly roll rates between delinquency buckets, cumulative loss rates and the allowance, with a worked example.
• Migration matrices and transition rates3 minute readHow a migration matrix (transition matrix) works for ECL: rating migration rates, multiplying the matrix for multi-year PDs, staging, with a worked example.
• Roll rates vs a provision matrix3 minute readRoll rate vs provision matrix for ECL compared: how each estimates loss rates, the data needed, how fast they react, and which suits trade receivables.

Forward-looking information

• Forward-looking information in ECL3 minute readForward-looking information in IFRS 9 ECL explained: reasonable and supportable forecasts, which macroeconomic variables, the forecast period and reversion.
• Macroeconomic scenarios for ECL3 minute readHow to design macroeconomic scenarios for ECL under IFRS 9: base, downside and upside cases, which variables, how severe, how many, with an example.
• Weighting ECL scenarios3 minute readHow scenario weighting works in IFRS 9 ECL: probability-weighted ECL across base, downside and upside cases, why non-linearity matters, with a worked example.
• ECL sensitivity analysis3 minute readECL sensitivity analysis explained: 100% scenario results, changing scenario weights, staging and PD sensitivities, and what IFRS 7 and IAS 1 require.

Management overlays

• Management overlays in ECL3 minute readManagement overlays in ECL explained: when models miss a risk, examples from COVID-19, inflation and sector stress, how overlays are sized, with an example.
• Post-model adjustments: governance and release3 minute readHow to govern post-model adjustments in ECL: identifying, quantifying, approving, monitoring and releasing overlays, with a register and audit expectations.

ECL for corporates

• ECL on intercompany loans3 minute readIntercompany loans ECL under IFRS 9 explained: term loans, loans repayable on demand, staging and recovery strategies, with examples and an Excel model.
• ECL on financial guarantee contracts3 minute readHow IFRS 9 measures financial guarantee contracts: the higher of ECL and the amortised initial fair value, and parent company guarantees, with an example.
• ECL on cash and bank balances3 minute readECL on cash and bank balances under IFRS 9: demand and term deposits, bank credit ratings, the low credit risk exemption, materiality, with an example.
• ECL on lease receivables3 minute readECL on lease receivables under IFRS 9: the net investment in a finance lease, operating lease receivables, the leased asset as collateral, and policy choices.
• ECL on contract assets3 minute readHow to measure ECL on contract assets: IFRS 15 contract assets and unbilled revenue, the simplified approach, excluding performance risk, with an example.

CECL alongside IFRS 9

• CECL forecasts and reversion3 minute readHow CECL forecast and reversion work under ASC 326: the reasonable and supportable forecast period, reverting to historical loss rates, with an example.
• CECL for off-balance-sheet exposures3 minute readOff-balance-sheet credit exposures under CECL: unfunded commitments, the unconditionally cancellable exception, financial guarantees, with an example.
• Credit losses on available-for-sale securities3 minute readCredit losses on available-for-sale debt securities under ASC 326-30: when an allowance is needed, the fair value floor, intent to sell, and an example.
• CECL disclosures3 minute readCECL disclosures under ASC 326: methodology, the allowance rollforward, credit quality indicators by vintage, gross write-offs, past due and nonaccrual.

Validation, disclosures and audit

• ECL disclosures under IFRS 73 minute readECL disclosures under IFRS 7: the loss allowance reconciliation by stage, gross carrying amounts, credit risk exposure and write-off policy, with an example.
• ECL model validation and back-testing3 minute readHow ECL model validation works: back-testing PDs and losses, discrimination and calibration, benchmarking, independent validation and simple company tests.
• How auditors test ECL3 minute readHow auditors test ECL under ISA 540: understanding the method, testing controls and data, challenging forecasts, SICR and overlays, and key audit matters.
• ECL journal entries3 minute readECL journal entries under IFRS 9 explained: recognising and increasing the loss allowance, write-offs, recoveries, stage 3 interest and FVOCI debt.

Excel models

Free ECL workbooks, each filled in with a worked example.

• ECL staging and lifetime calculatorExcel download12-month and lifetime ECL from marginal PDs, LGD, EAD and discounting, with the SICR test that sets each loan's stage.
• PD term structure modelExcel downloadMarginal, cumulative and conditional PDs, a point-in-time adjustment for the economy, and illustrative curves by rating grade.
• LGD calculatorExcel downloadLoss given default from collateral value, haircuts, costs and time to recover, plus workout LGD from past defaults.
• EAD and CCF calculatorExcel downloadExposure at default for amortising loans with prepayments, and for revolving facilities using credit conversion factors from history.
• Loss rate builderExcel downloadProvision matrix loss rates from eight quarters of history, a forward-looking adjustment, and the effect of segmenting customers.
• Scenario weighting modelExcel downloadPD and LGD under base, downside and upside scenarios, the probability-weighted ECL, the non-linearity effect and sensitivities.
• Roll rate modelExcel downloadRoll rates from monthly delinquency data, cumulative loss rates and the allowance, plus a rating migration matrix with multi-year PDs.
• Intercompany loan ECL calculatorExcel downloadECL on intercompany term loans and loans repayable on demand, financial guarantees, and cash and bank balances.
• CECL calculatorExcel downloadLifetime CECL on a loan pool with forecasts and reversion, unfunded commitments, and credit losses on available-for-sale securities. US GAAP.
• IFRS 7 loss allowance roll-forwardExcel downloadThe loss allowance reconciled by stage from opening to closing, with transfers, the profit or loss charge and coverage ratios.

The standards behind ECL

About these guides

Each guide is written in our own words with a worked example, by Chartered Accountants. The section covers all 40 topics, from staging and SICR to PD, LGD and EAD, scenarios, overlays, ECL for corporates and CECL, with 10 Excel models.