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Expected Credit Losses Background and Overview

Expected Credit Losses (ECL) is a financial accounting term that refers to the estimated loss an organization expects to incur from its financial instrument’s portfolio over a specific period. It is governed by IFRS 9 and ASC 326. It requires organizations to use historical data, current conditions, and reasonable and supportable forecasts to calculate the anticipated credit losses over the financial asset’s life. This proactive approach will lead to more accurate financial reporting, improved risk management, and better decision-making.

Expected Credit Loss (ECL) is a complex process that involves assessing the credit risk of financial instruments in the portfolio, estimating the expected credit losses, and recognizing the ECL as a provision or allowance in the financial statements. Implementing ECL is important for organizations as it provides a structured approach for estimating and accounting for credit losses, which helps ensure that the financial statements give a reliable and accurate representation of the organization’s financial position and performance.