Measuring expected credit losses

Learning objectives

• Calculate an expected credit loss as an unbiased, probability-weighted amount across scenarios, discounted at the effective interest rate, using reasonable and supportable information.L3, L4
• Prepare a workpaper documenting the measurement of expected credit losses.L3, L4
• Support in writing, from the facts of the case, the judgement made on the measurement of expected credit losses.L3, L4

Normative references

• IFRS 9 §5.5.17Expected credit losses are measured so as to reflect an unbiased and probability-weighted amount, 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 about past events, current conditions and forecasts of future economic conditions.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Mer SA estimates the expected credit loss of a loan portfolio under three economic scenarios. The losses, already expressed in present value, and the probabilities are case data: stable scenario {loss_scenario_1} at {probability_scenario_1}; slowdown {loss_scenario_2} at {probability_scenario_2}; recession {loss_scenario_3} at {probability_scenario_3}. Calculate the probability-weighted expected credit loss.L3
• What must the estimate of an expected credit loss reflect?L3
• Mer SA must estimate the expected credit loss of a portfolio of corporate loans. Facts of the case: three economic scenarios (stable, slowdown, recession) have been built, with probabilities and losses per scenario; management is considering retaining only the slowdown scenario, judged the most likely, to simplify the calculation. Write a short note that concludes on the estimation method, distinguishing the facts of the case, the rule and professional judgement.L4