Under IFRS 9, debt instruments, excluding purchased or originated credit impaired financial instruments, move through three stages as credit quality changes after initial recognition. The IFRS expected credit loss (ECL) model is a three-stage approach for estimating and measuring expected credit loss of a financial asset and its interest revenue over its lifetime based on changes in its expected credit loss. ECL generally equals the average expected credit loss resulting from the asset’s probability of default (PD), exposure at default (EAD), and loss given default (LGD) over a given time horizon. A simplified approach is available for trade and lease receivable and contract assets.
| Expected Credit Loss Formula | |
| ECL = ∑(PD x LGD x EAD x DF) | |
| Where: | |
| ECL | = Expected Credit Loss |
| PD | = Probability of Default |
| LGD | = Loss Given Default |
| EAD | = Exposure at Default |
| DF | = Discount Factor (EIR) |
Under IFRS, the gross carrying amount (GCA) of a financial asset is its amortized cost before adjusting for any loss allowance, it equaling the initial cost of the asset less any principal repayment and asset amortization. The net carrying amount of a financial asset is its gross carrying amount less any loss allowance, it being an impaired asset’s probable recovery value and the amount upon which the interest income from a nonperforming asset is calculated.
| Arriving at Net Carrying Amount of an Impaired Financial Asset |
| Amount Initially Recognized |
| − Principal Repayments |
| +/− Cumulative Amortization |
| = Gross Carrying Amount |
| − Loss Allowance |
| = Net Carrying Amount |