calculate loss given default ifrs 9

​Loss Given Default (LGD) is a key component in the calculation of Expected Credit Loss (ECL) under IFRS 9. It represents the percentage of loss an entity expects to incur in the event of default. The calculation of LGD involves estimating the amount of loss that would occur at the time of default, considering recoveries such as collateral. Here's a general approach to calculate LGD:

1. **Determine the Exposure at Default (EAD)**:

   - EAD is the total value exposed at the time of default. This includes the outstanding balance of the loan or credit exposure.

2. **Estimate the Recovery Amount**:

   - Calculate the amount that can be recovered in the event of default. This could include proceeds from the sale of collateral, cash flows from post-default payments, or other credit enhancements.

3. **Calculate the Loss Amount**:

   - The loss amount is essentially the difference between the EAD and the estimated recovery amount.

4. **Express LGD as a Percentage**:

   - LGD is calculated as a percentage and is represented by the formula:

Let's consider a simple example:

- Exposure at Default (EAD): R100,000

- Estimated Recovery Amount (from collateral or other sources): R30,000

Now, we will calculate the LGD.

Based on the given data, the Loss Given Default (LGD) for the loan is calculated to be 70%. This means that in the event of a default, the entity expects to incur a loss equivalent to 70% of the exposure at default, after considering the recoveries from collateral or other sources.