Intercompany loans ECL: how is it measured?
An example: an intercompany term loan
A parent has lent 5,000,000 to a subsidiary for three more years. The subsidiary has no rating, so the parent maps it to a BB-equivalent grade, with a 12-month PD of 0.8% and a three-year lifetime PD of 3.9%. When the loan was made, the expected lifetime PD for the same remaining term was 2.0%. LGD is 45%, as the loan is unsecured and ranks behind the subsidiary's bank debt.
| Step | Result |
|---|---|
| Lifetime PD multiple since origination: 3.9% / 2.0% | 1.95x, below the 2.0x SICR threshold |
| Stage | 1 |
| 12-month ECL: 5,000,000 x 0.8% x 45% | 18,000 |
| Lifetime ECL if it moved to stage 2: 5,000,000 x 3.9% x 45% | 87,750 |
An example: a loan repayable on demand
A parent has an interest-free loan of 5,000,000 to a subsidiary, repayable on demand. The subsidiary holds 1,500,000 of liquid assets, so it could not repay in full if asked today. The parent considers how it would recover the loan:
| Recovery strategy | Probability | Recovered | Loss |
|---|---|---|---|
| A. Subsidiary repays the rest over three years from its cash flows | 60% | 5,000,000 | 0 |
| B. Subsidiary sells assets now; net proceeds 3,000,000 | 40% | 4,500,000 | 500,000 |
| ECL | 200,000 |
Because the loan is interest-free, its effective interest rate is 0%, and discounting the repayments in strategy A at that rate gives no loss: waiting to be repaid does not create ECL, only shortfalls do. On an interest-bearing loan, the delay in strategy A would create a loss through discounting. The Intercompany loan ECL calculator (Excel) runs both examples.
What if the demand loan carried interest?
Suppose the same loan carried interest at 6%. Recovering the 3,500,000 shortfall in three equal annual instalments would then be worth only about 3,118,500 today at the 6% effective rate, a loss of about 381,500 in strategy A. The ECL becomes 60% x 381,500 + 40% x 500,000, about 428,900, more than double the interest-free figure, because the delay now costs the lender interest it is entitled to.
Why does "repayable on demand" change the calculation?
ECL is measured over the maximum contractual period, which for a demand loan is the demand period, typically a day. So 12-month and lifetime ECL are the same, and staging makes little difference. The question becomes what the lender would recover if it demanded repayment now, which is why the borrower's liquid assets and the lender's realistic recovery options matter.
Where does the data come from?
From inside the group: the subsidiary's forecasts, budgets and balance sheet, which the parent already has. That makes intercompany ECL easier to support than many external exposures, but auditors will expect the analysis to use that information honestly, including any subsidiary that is loss-making or relies on group support.
What about other intra-group balances?
Trade balances between group companies follow the same rules as external receivables, usually with the simplified approach, and deposits a group treasury company holds with banks need their own assessment; see ECL on cash and bank balances.
What happens on consolidation?
The loan, the subsidiary's liability and the ECL allowance are all eliminated. The allowance affects only the parent's separate financial statements, and the subsidiary's own accounts, where it is the borrower, are unaffected. See financial guarantees, PD from external ratings and intragroup eliminations.
Need help applying the standards?
Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.
Questions people ask
Do intercompany loans need an ECL allowance?
Yes, in the lender's separate financial statements under the IFRS 9 general approach; it is eliminated on consolidation.
How is ECL calculated on a loan repayable on demand?
By assuming the loan is demanded at the reporting date and assessing what the lender would recover, considering the borrower's liquid assets and realistic recovery strategies.
Does an interest-free intercompany loan create ECL when repayment is delayed?
Not from the delay alone, because the effective interest rate is 0%; only shortfalls in recovery create ECL.
How is PD estimated for an unrated subsidiary?
Usually by mapping its financial ratios to a rating grade and using that grade's PD, adjusted to point in time.
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.