calculate ecl for loans receivable ifrs 9

​Calculating the Expected Credit Loss (ECL) for loans receivable under IFRS 9 involves a detailed process that combines probability of default (PD), loss given default (LGD), and exposure at default (EAD). Let's go through a simplified example to demonstrate the calculation:

Assume we have a portfolio of loans with the following characteristics:

1. Total outstanding balance (EAD): R1,000,000.

2. Estimated average lifetime of loans: 5 years.

3. Annual Probability of Default (PD): 2%.

4. Loss Given Default (LGD): 40% of the exposure.

5. The effective interest rate for discounting: 5%.

Now, let's calculate the EC

### Step 1: Calculate ECL for Each Year

For simplicity, we assume linear exposure and constant PD and LGD over the lifetime. The ECL for each year would be calculated as follows:

ECLyear = PD X LGD × EADyear

### Step 2: Discount ECL to Present Value

Since ECL is a future loss, we need to discount it back to its present value using the effective interest rate.

### Step 3: Sum the Present Value of ECL for Each Year

Sum the present values of the ECL over the 5-year period to get the total ECL.

Let's perform these Based on the given data, the total Expected Credit Loss (ECL) for the loans receivable, discounted to present value over the 5-year period, is approximately R34,635.81.

This calculation assumes a linear exposure and constant Probability of Default and Loss Given Default over the loan lifetime. In practice, these factors might vary over time and should be adjusted accordingly. Additionally, various assumptions and estimates used in this calculation, such as the effective interest rate and the loss given default, can significantly impact the ECL amount.