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ECL on cash and bank balances

Most companies never record an allowance on their bank balances, and most are right not to, but they should be able to show why. This guide explains how IFRS 9 applies to cash and deposits, how to estimate the ECL, when it becomes material, and what auditors expect.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. 3 minute read.

Short answer

ECL on cash and bank balances is required in principle, because bank deposits are financial assets at amortised cost within the IFRS 9 impairment rules. In practice it is usually immaterial: deposits with well-rated banks have very low PDs, demand deposits have a contractual period of only a day, and the low credit risk exemption keeps investment grade exposures in stage 1. Companies estimate it from each bank's rating, the remaining term and an LGD, and recognise it if material. In this guide's example, ECL on 5,500,000 of deposits is 4,250.

At a glance

In scope: Cash at bank and deposits at amortised cost
Demand deposits: Very short contractual period
Inputs: Bank rating, remaining term, LGD
Low credit risk: Investment grade stays in stage 1
Usual outcome: Immaterial, but documented
Excel: Intercompany loan ECL calculator

Key facts at a glance, as set out in this guide.

An example: ECL on three banks

The weakest bank, not the largest balance, drives the ECL.

Bank	Rating	Balance	Months left	12-month PD	ECL at 60% LGD
Bank A, current account	AA	2,000,000	1	0.05%	50
Bank B, term deposit	BBB	3,000,000	6	0.20%	1,800
Bank C, term deposit	BB	500,000	12	0.80%	2,400
Total		5,500,000			4,250

ECL = balance x PD over the remaining term x LGD, with the 12-month PD scaled down for terms under a year. The smallest deposit, with the weakest bank, carries more than half the ECL. Against a materiality threshold of 25,000, the total is immaterial, and the company documents the calculation rather than recognising it. The Bank balances sheet of the Intercompany loan ECL calculator (Excel) runs this test.

Is ECL on cash and bank balances required?

Yes. Cash at bank, deposits and cash equivalents measured at amortised cost are within the IFRS 9 impairment requirements, using the general approach. There is no exemption for cash, but materiality applies as it does everywhere in financial statements.

Why are demand deposits usually negligible?

ECL is measured over the maximum contractual period. A current account can be withdrawn at any time, so its contractual period is effectively a day, and the probability of the bank defaulting in that period is tiny. Term deposits have a longer period and carry slightly more ECL, which is why deposits with weaker banks for longer terms deserve a closer look.

How does the low credit risk exemption help?

Deposits with banks rated investment grade can be assumed to have no significant increase in credit risk, so they stay in stage 1 with 12-month ECL. If a bank is downgraded below investment grade, the company must assess whether credit risk has increased significantly since the deposit was made.

What about money market funds and other cash equivalents?

Investments in money market funds are usually measured at fair value through profit or loss and are outside the ECL rules, because their value already reflects credit risk. Treasury bills and commercial paper held at amortised cost are within the rules, using the issuer's rating in the same way as a bank deposit.

When does ECL on cash become material?

When a company holds large deposits with banks of weak credit quality, for example in countries with low sovereign ratings, or places long-term deposits with a single bank. Groups operating in such markets often find the allowance is worth recognising, and should consider concentration risk in their disclosures.

What if a bank or country comes under stress?

A downgrade of a bank or its home country, restrictions on moving money out, or a bank's failure to meet withdrawals are signs that credit risk has increased significantly. Deposits affected move to stage 2 and lifetime ECL, and restricted balances may need to be reclassified out of cash and cash equivalents.

What should be documented?

A short annual assessment listing each bank, its credit ratings from the main agencies, the balances and terms, the estimated ECL and the materiality conclusion. That is usually all auditors need, and it shows the requirement has been considered. See PD from external ratings, the low credit risk exemption and ECL on intercompany loans.

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Questions people ask

Is ECL required on cash and bank balances?

Yes, in principle: bank deposits at amortised cost are within IFRS 9 impairment. In practice the amount is usually immaterial.

How do you calculate ECL on bank deposits?

Multiply each balance by the bank's PD over the remaining term, based on its credit rating, and by an LGD.

Why is ECL on current accounts negligible?

Because a demand deposit's contractual period is effectively a day, so the chance of the bank defaulting within it is tiny.

Does the low credit risk exemption apply to bank deposits?

Yes. Deposits with investment grade banks can be kept in stage 1 with 12-month ECL.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

More in ECL

This guide is general information. It is not tax or legal advice for your situation.