General Approach to Expected Credit Losses (ECL) I IND AS 109 I

The general approach to Expected Credit Losses (ECL) is a forward-looking method that requires entities to account for expected credit losses rather than incurred losses. This approach is more complex and involves several key steps:

Identification of Exposure at Default (EAD): This is the total amount exposed to risk, which is calculated by considering the principal amount outstanding and the repayment rate based on historical data.
Calculation of Probability of Default (PD): This is an estimate of the likelihood that a borrower will default within a certain time frame. Historical loss experience is adjusted by economic factors to predict future defaults.
Determination of Loss Given Default (LGD): This step involves estimating the loss an entity would incur if a borrower defaults, taking into account the recovery of any collateral or other credit enhancements.
Incorporation of Forward-Looking Information: Entities must consider macro-economic information and its impact on credit risk, adjusting the historical PD and LGD accordingly.

The general approach is typically used by banks and financial institutions with more sophisticated credit risk management systems and applies to financial assets measured at amortized cost or fair value through other comprehensive income.