What are the three ECL stages?
- Stage 1: every asset starts here on initial recognition, except purchased or originated credit-impaired assets. The allowance is 12-month ECL: lifetime losses on defaults expected in the next 12 months.
- Stage 2: credit risk has increased significantly since initial recognition. The allowance becomes lifetime ECL, though interest is still calculated on the gross carrying amount. See significant increase in credit risk.
- Stage 3: the asset is credit-impaired, usually because the borrower has defaulted. The allowance is lifetime ECL and interest revenue is calculated on the amortised cost, net of the allowance. See credit-impaired assets.
An example: staging a six-loan portfolio
A lender uses an LGD of 40%. A loan is in stage 2 if its lifetime PD has at least doubled since origination and risen by at least one percentage point, or if it is more than 30 days past due; stage 3 if more than 90 days past due.
| Loan | Balance | Lifetime PD: origination / now | Days past due | Stage | ECL |
|---|---|---|---|---|---|
| A | 400,000 | 4.0% / 4.5% | 0 | 1 | 1,600 (12-month PD 1.0%) |
| B | 250,000 | 3.0% / 7.5% | 0 | 2: PD up 2.5x | 7,500 (lifetime PD) |
| C | 150,000 | 0.5% / 1.2% | 0 | 1: up 2.4x but less than 1 point | 180 |
| D | 100,000 | 5.0% / 6.0% | 45 | 2: over 30 days | 2,400 |
| E | 60,000 | 6.0% / 20.0% | 120 | 3: over 90 days | 24,000 (PD 100%) |
| F | 40,000 | 2.0% / 2.5% | 10 | 1 | 96 |
Total ECL is 35,776: stage 1 holds 59% of the balance but only 5% of the allowance, while one stage 3 loan accounts for two thirds of it. Moving loan B from stage 1 to stage 2 multiplied its allowance by more than three. The figures use balance x PD x LGD without discounting, for clarity; the ECL staging and lifetime calculator (Excel) runs the same portfolio.
How does interest revenue change between stages?
In stages 1 and 2, interest revenue is the effective interest rate applied to the gross carrying amount, before the allowance. In stage 3, it is applied to the amortised cost, net of the allowance. A stage 3 loan of 100,000 with an allowance of 40,000 and a 10% effective rate earns 6,000 of interest revenue, not 10,000.
Can assets move back to an earlier stage?
Yes. Staging is symmetrical: if credit risk is no longer significantly higher than at origination, the asset returns to stage 1 and the allowance falls back to 12-month ECL. Many lenders apply probation periods, for example three months of payments before a stage 2 asset returns to stage 1, or twelve months for restructured loans, to avoid assets moving back and forth.
What is the cliff effect?
For banks, whose loan books are mostly under the general approach, staging is one of the main drivers of results; see bank accounting.
The jump in the allowance when an asset moves from 12-month to lifetime ECL. For long-dated loans it can be large, which is why the SICR criteria are among the most closely examined judgements in a lender's financial statements. Trade receivables avoid the cliff because the simplified approach always uses lifetime ECL; see simplified vs general approach.
What is disclosed by stage?
IFRS 7 requires a reconciliation of the loss allowance from opening to closing balance, showing 12-month ECL, lifetime ECL not credit-impaired and lifetime ECL credit-impaired separately, with transfers between stages, new assets, derecognitions and write-offs. See how to calculate ECL and IFRS 9 expected credit losses.
Need help applying the standards?
Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.
Questions people ask
What are the three stages of ECL under IFRS 9?
Stage 1, performing assets with 12-month ECL; stage 2, assets with a significant increase in credit risk and lifetime ECL; stage 3, credit-impaired assets with lifetime ECL and interest on the net amount.
What is the difference between stage 2 and stage 3?
Both carry lifetime ECL, but stage 3 assets are credit-impaired and earn interest revenue on the net carrying amount.
Can a loan move from stage 2 back to stage 1?
Yes, when its credit risk is no longer significantly higher than at origination, often after a probation period.
Do trade receivables have stages?
Not usually. Under the simplified approach they always carry lifetime ECL.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
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.
Related guides
More in ECL
This guide is general information. It is not tax or legal advice for your situation.