Page 84 - CMA Journal (Nov-Dec 2025)

Expected Credit Loss (ECL)

Articles Section
A Complete Conceptual

and Practical Guide

Introduction – Trade receivables
– Loans
Expected Credit Loss (ECL) is a forward-looking
– Advances
impairment model introduced in International Financial
– Financial assets at
Reporting Standard 9 – Financial Instruments, replacing
amortized cost
International Accounting Standard 39. Expected Credit
– Certain
Loss represents the amount an entity expects to lose on
investments
its financial assets—such as receivables, loans, and
advances even before an actual default occurs. This Calculation of
approach significantly increases financial stability, credit Expected Credit
risk assessment and transparency.
Loss
Definition of ECL
Simplest Formula
ECL is the estimated loss that an entity expects to incur
Expected Credit Loss
because a customer or counterparty may: Syed Adnan Hussain
= PDx LGDx EAD
 pay late, Shah, FCMA
Where:
 pay partially, or
 fail to pay entirely. – Probability of Default (PD): Likelihood that
a customer will not pay
ECL incorporates:
– Loss Given Default (LGD): Percentage loss if
 Future expectations of risk,
default occurs
 Probability of default (PD),
– Exposure at Default (EAD): Balance Outstanding
Expected timing of cash flows, and
 Time value of money (discounting). Step-by-Step ECL Process
This makes ECL a more realistic measure of financial risk Step 1: Assess Credit Risk
compared to the old incurred-loss approach.
Initially, the credit risk should be evaluated to determine
Global Implementation of ECL Under IFRS 9
whether it has increased significantly since initial
IFRS 9 became effective from January 1st, 2018 recognition. Indicators include:
internationally. The standard addressed major

weaknesses in IAS-39, particularly the recognition of  Payment delays beyond 30 days
credit losses only after a default event. IFRS 9 introduced  Internal or external credit rating downgrade
the “expected loss” model to ensure that losses are  Weakening financial position
recognized in a timely and forward-looking manner.  Negative macroeconomic trends
Implementation of ECL in Pakistan Step 2: Determine the Stage of the Asset

Pakistan adopted IFRS 9 in phases: Under the IFRS-9 financial assets are divided into three
stages:
1. Banks and DFIs
– Enforced by State Bank of Pakistan (SBP) Stage Credit Quality Measurement Example
– IFRS 9 Circular No. 4 of 2022 1 Credit Risk is low ECL with 12 Payments are coming
– Fully effective 1 January 2023 months normally
2. Listed (Non-Banking) Companies 2 Risk increased ECL – Lifetime Payments delays > 30
days
– SECP adopted IFRS 9 vide S.R.O. 116(I)/2020
3 Default / credit- ECL – Lifetime Payments delays > 90
– Effective 1 July 2020
impaired with high PD & days
Therefore, all public companies in Pakistan must apply LGD
ECL to:

82 ICMA’s Chartered Management Accountant, Nov-Dec 2025