ECL Calculation

12-month and lifetime ECL calculation methods

ECL Calculation Overview

Expected Credit Loss is the probability-weighted estimate of credit losses over a specified time horizon. The calculation approach depends on the stage of the exposure.

ECL = Σ [PD(t) × LGD × EAD(t) × DF(t)]
Summed over all time periods in the relevant horizon
Stage 1: 12-Month ECL

ECL from defaults expected to occur within 12 months of the reporting date, representing a portion of lifetime ECL.

Stage 2 & 3: Lifetime ECL

ECL from all possible defaults over the remaining expected life of the financial instrument.

12-Month ECL Calculation

12-month ECL is the portion of lifetime ECL that represents credit losses from defaults expected to occur within 12 months. It is NOT the lifetime ECL for loans with 12-month maturity.

Simplified Approach
12-Month ECL = PD12m × LGD × EAD × DF

Where:

  • PD12m = 12-month probability of default
  • LGD = Loss given default
  • EAD = Current exposure at default
  • DF = Discount factor (typically at 6-month midpoint)

Example: 12-Month ECL

Inputs
  • EAD: $100,000
  • 12-Month PD: 2%
  • LGD: 45%
  • EIR: 5%
Calculation
  • DF = 1/(1+0.05)^0.5 = 0.976
  • ECL = 2% × 45% × $100,000 × 0.976
Result

$878

12-Month ECL

Lifetime ECL Calculation

Lifetime ECL requires projecting PD, LGD, and EAD over the remaining life of the exposure and discounting expected losses back to the reporting date.

Period-by-Period Approach
Lifetime ECL = Σt=1T [Marginal PD(t) × LGD × EAD(t) × DF(t)]

For each period t:

  • Marginal PD(t) = Probability of default in period t, conditional on survival to t-1
  • EAD(t) = Expected exposure at time t (considering amortization)
  • DF(t) = Discount factor for period t = 1/(1+EIR)t

Example: Lifetime ECL (5-Year Loan)

Year EAD Marginal PD LGD DF (5% EIR) Period ECL
1 $100,000 2.00% 45% 0.9524 $857
2 $80,000 1.96% 45% 0.9070 $639
3 $60,000 1.92% 45% 0.8638 $448
4 $40,000 1.88% 45% 0.8227 $278
5 $20,000 1.85% 45% 0.7835 $130
Total Lifetime ECL $2,352

Time Value of Money

IFRS 9 requires ECL to be discounted to present value using the effective interest rate (EIR) determined at initial recognition.

Why Discount?
  • Credit losses occur at different future dates
  • Future losses have lower present value
  • Aligns with asset measurement at amortized cost
  • Uses original EIR for consistency
Discount Factor Formula
DF(t) = 1 / (1 + EIR)t
Where EIR is the effective interest rate and t is the time in years
For Variable Rate Instruments

For variable rate financial assets, use the current effective interest rate at the reporting date for discounting purposes.

Calculation Approaches

When to use: Large exposures, Stage 3 assets, unique characteristics

  • Calculate ECL at individual loan level
  • Use borrower-specific PD, LGD, EAD
  • Consider specific collateral and circumstances
  • More accurate but resource-intensive

When to use: Large portfolios of similar loans, Stage 1 & 2 retail exposures

  • Group loans with shared risk characteristics
  • Apply segment-level PD, LGD parameters
  • Use statistical models and historical data
  • Efficient for high-volume portfolios

When to use: Simpler portfolios, limited data availability

  • Apply historical loss rates directly
  • Adjust for forward-looking information
  • ECL = Exposure × Loss Rate
  • Common for trade receivables (simplified approach)

Worked Examples

Example 1: Stage 1 Corporate Loan
Loan Details
  • Outstanding Balance: $1,000,000
  • Rating: BBB (12-month PD: 0.20%)
  • Secured by property (LGD: 35%)
  • EIR: 6%
  • Stage: 1 (Performing)
ECL Calculation
ECL = 0.20% × 35% × $1,000,000 × 0.971
ECL = $680
Coverage ratio: 0.068%
Example 2: Stage 2 SME Loan
Loan Details
  • Outstanding Balance: $250,000
  • Rating: BB (downgraded from BBB)
  • Unsecured (LGD: 60%)
  • Remaining life: 3 years
  • Stage: 2 (SICR triggered)
Lifetime ECL Calculation
YearMarginal PDECL
11.00%$1,415
20.99%$1,303
30.98%$1,200
Total$3,918
Example 3: Stage 3 Credit Card
Exposure Details
  • Outstanding Balance: $15,000
  • Status: 95 days past due (defaulted)
  • Unsecured (LGD: 85%)
  • PD: 100% (already defaulted)
  • Stage: 3 (Credit impaired)
ECL Calculation
ECL = 100% × 85% × $15,000
ECL = $12,750
Note: For defaulted accounts, PD = 100%. Interest accrues on net carrying amount ($2,250).
Try the Full ECL Calculator

Calculate ECL with all components and visualizations

Open ECL Calculator
ECL Components Next: Forward-Looking Info