‘Expected credit losses’ (ECLs) were introduced in 2018 by International Financial Reporting Standard (IFRS) 9 on financial instruments, replacing the looser impairment requirements of earlier standards. IFRS 9 requires you to charge your accounts up front to account for the risk that you will not get paid amounts you are due in full or on time. The standard applies only where you have a contractual right to receive future payments: so it would generally apply to receivables, loans and deposits made, but not to shares owned. It also applies to commitments and guarantees given, as these still bear credit risk.
The amount that you need to charge for any given balance needs to be calculated based on:
If you make a loan to a 100% subsidiary it is important to understand that this loan still has risk to you and you still stand to lose out of your subsidiary does not repay it. Therefore, an ECL is required in the parent company’s accounts even if it will be removed on consolidation for the group accounts.
To calculate an ECL you need to consider at least two possible outcomes, and make an unbiased judgement as to the probability of these outcomes occurring. One outcome is clearly ‘no default – all repayments received in full and on time’, other outcomes include getting nothing, getting less than you expected, or getting payments later than expected. If you have lent to (well regarded) national government or a highly-rated large bank, the probability of the various default options will probably be small. If your creditor is a newly set up company, or a small business, or a charity struggling for cash these probabilities (and the resulting ECL) are likely to be much higher. Considering the time value of money means that you have to factor in that money received, say, two years’ late is worse than money received on time and should result in a higher ECL calculation.
‘Reasonable and supportable information’ clearly means don’t just guess: you are required to base judgements on something you can justify to the auditor at a later date. However there is an important caveat that you should base the calculations on things you can find out ‘without undue cost or effort’. So the accounting standard is reasonable: you are expected to do some work in finding things out and estimating things properly, but not spend millions of pounds and hire an army of administrators to do so. I would add here that there is a general expectation that if something relevant is known by your organisation you will be expected to include it – the operational department not telling the finance department this information will not be regarded as an acceptable excuse.
ECLs are inherently forward looking as they look at the probability that a default will occur within a future time period. However what the standard is saying is that to calculate an ECL you should also consider past events and current circumstances. This is a fairly common sense approach, as credit risk is generally influenced by what has happened before and what the situation is now. The most common past events to consider are previous late payments and the past financial performance of the creditor. The past, present and expected future wider economic climate should also be considered: defaults become more likely for most companies in a recession, for example.
Arlingclose has extensive experience in calculating IFRS 9 compliant expected credit losses. For more information on how we can help please contact us at info@arlingclose.com or on 08448 808 200.
02/03/2026
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