Expected Credit Loss Model

The probability-weighted estimate of credit losses (i.e., the present value of all cash shortages) throughout the estimated life of a Financial Instrument is known as expected credit loss (ECL). In the context of IFRS 9, this idea is very essential. The new IFRS 9 Financial Instruments standard changed the way bad debt provisions on trade receivables are calculated. Previously, firms only gave compensation after a loss had occurred. Companies must account for what they expect the loss to be on the day they raise the invoice, and they must modify their estimate of that loss until they are paid, according to IFRS 9. Expected credit losses (ECLs) are a concept that requires businesses to consider how current and future economic conditions may affect the amount of loss. Banks aren’t the only ones who suffer from credit losses. The general model or the simplified model are used to calculate ECLs on trade receivables. This article focuses on concerns that are especially important to the simplified model, in which ECL is calculated as a percentage of lifetime ECL.


The ECL method applies to all instruments held at amortized cost as well as all instruments held at fair value via other comprehensive income in the framework of IFRS 9. When measuring ECLs under the simplified approach, IFRS 9 allows the use of practical expedients, such as a provision matrix. A provision matrix might be used by a corporation to capture the drastically varying historical credit loss history for distinct client categories.

Calculation Requirements

According the IFRS 9 standard, the measurement of expected credit losses of a financial instrument should reflect:

  • an unbiased and probability-weighted amount of potential loss that is determined by evaluating a range of possible outcomes;
  • the time value of money; and
  • reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.


It is no longer essential for a credit event to have happened before credit losses are recognized under the new impairment procedure introduced by IFRS 9. (as with the previous incurred loss accounting approach). Instead, a company must always account for predicted credit losses, as well as changes in those losses.

At each reporting date, the amount of projected credit losses is adjusted to reflect changes in credit risk after first recognition, resulting in more timely information on expected credit losses.

When measuring ECLs for trade receivables:

  • assess how to incorporate forward-looking information about the impacts of the COVID-19 outbreak;
  • consider whether the segmentation applied to measure ECL appropriately captures the different types of customers or regions that are affected in different ways by the economic effects of the COVID-19 outbreak;
  • assess whether a trade receivable has been modified and if so whether it continues to be appropriate to use a discount rate of zero; and
  • consider how to incorporate the impact of any credit insurance and government support.
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