MathishaGammanpila

IFRS 9 ECL Demo

Every provision number in a bank's accounts comes down to three inputs: the chance of default (PD), the loss if it happens (LGD), and the exposure at that moment (EAD). Pick a stage, set the inputs, and watch the number build — year by year for lifetime ECL.

Step 1 — which stage is the loan in?

Stage decides the measurement horizon. Click a card to select.

Stage 1 Performing

No significant increase in credit risk since origination. Interest recognised on gross carrying amount.

→ 12-month ECL

Stage 2 Underperforming

Significant increase in credit risk (SICR) — e.g. 30+ days past due, watchlist, downgrade. Interest still on gross.

→ Lifetime ECL

Stage 3 Credit-impaired

Defaulted / objective evidence of impairment — typically 90+ days past due. Interest on the net (amortised cost − ECL).

→ Lifetime ECL, PD = 100%

Step 2 — the inputs

EAD — exposure at default

PD — annual (12-month)

LGD — loss given default

Remaining life

years

EIR (discount rate)

Step 3 — the formula, live

ECL provision

—

Coverage ratio

—

ECL ÷ EAD

Lifetime PD

—

Net carrying value

—

EAD − ECL

The lifetime build — year by year

Each year's expected loss = the chance the loan survives to that year and then defaults (marginal PD), × LGD × EAD, discounted back at the EIR.

Year	Survival to start	Marginal PD	Expected loss	DF @ EIR	Discounted

What's simplified here

Constant annual PD (a flat hazard rate) — real models use PD term structures that usually decline for seasoned loans, plus forward-looking macro overlays across multiple probability-weighted scenarios.
EAD held flat — real models amortise it down a repayment schedule and add expected drawdowns on undrawn limits (via a CCF).
LGD as one number — in practice it's collateral-driven, discounted cure/recovery paths, floored by regulators.
Mid-year default timing convention: losses discounted from year-end for simplicity.
Illustrative teaching tool — not an accounting policy, not advice, and not any specific bank's methodology.