Page 85 - CMA Journal (Nov-Dec 2025)

Articles Section

Stage 1 – 12-Month ECL How Companies Determine PD, LGD,
Expected Credit Loss = PD (stage 1) X LGD X EAD and Loss Rates
(Low PD & LGD)
Factors include:
Stage 2 – Lifetime ECL
 Historical default data
Expected Credit Loss = PD (stage 2) X LGD X EAD
(High PD & LGD)  Customer behaviour patterns

Includes forward-looking economic adjustments.
 Market conditions (GDP, inflation, currency

Stage 3 – Credit Impaired devaluation)
Expected Credit Loss = PD (stage 3) X LGD X EAD
 Forward-looking macroeconomic assumptions
(discounted)
 Industry-specific risk experience
ECL = Carrying Amount — PV (Expected Cash Flows)
(High PD & LGD) Conclusion
Includes forward-looking economic adjustments.
The Expected Credit
The rate of discount should be the effective interest rate. Loss (ECL) model
under IFRS 9 is a big
Requirements:
improvement in how
– Cash flow forecasting companies identify
– Discounting credit risk. Instead of
waiting for a loss to
– Professional judgment
happen, ECL uses a
Simplified Approach for Trade Receivables forward-looking method to estimate possible losses in
Used for customers and routine receivables. advance. This makes financial statements more reliable
and helps businesses manage risk better.
Aging Method
1. Prepare an aging schedule As companies apply this model, they need strong data,
better risk-management processes, and good analysis
2. Assign loss rates to each bucket
tools. In the end, ECL is more than just an accounting
3. Multiply balance × loss rate rule—it helps organizations stay prepared, protect their
financial health, and make better decisions in a changing
Example
economic environment.
Aging Balance Loss Rate ECL
About the Author: Syed Adnan Hussain Shah is a seasoned
0–30 days 2,000,000 1% 20,000 finance professional with 22 years of vast industry experience. His
expertise spans Financial Services, including Pensions and Asset
31–60 days 1,200,000 5% 60,000
Management, Microfinance and SME lending, and Insurance
61–90 days 800,000 10% 80,000 Services. He is an FCMA from the Institute of Cost & Management
Accountants of Pakistan and holds an Advance Diploma in
90+ days 500,000 50% 250,000 Management Accounting from CIMA.
Total ECL 410,000

ICMA’s Chartered Management Accountant, Nov-Dec 2025 83