Expected credit losses
IFRS 9 estimates the present value of cash shortfalls using reasonable and supportable information, including forward-looking information. For the general approach, a significant increase in credit risk since initial recognition normally changes the allowance from 12-month to lifetime expected credit losses; a simplified approach applies to specified receivables and contract assets. Lifetime expected credit losses are not simply the amount overdue today.
Worked example
A lender estimates a 10% probability of a discounted $1,000 shortfall and a 90% probability of no shortfall. The probability-weighted expected loss is $100, assuming these scenarios capture all relevant outcomes.
Common mistake
Recognising an allowance only after actual default, or ignoring discounting and future economic conditions.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | SBR | Direct | September 2026–June 2027 |