# 12-month Expected Credit Losses

From Open Risk Manual

## Definition

**12-month Expected Credit Losses** in the context of IFRS 9^{[1]} denote the portion of Lifetime Expected Credit Losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date.

## Formula

Conceptually the definition is captured in the following mathematical expression

- Where t is the reporting date
- i denotes possible times of default / loss (normally associated with instrument cashflows) within the 12-month period
- d
_{i}is the random (unknown) event of default at time i - LGD denotes Loss Given Default
- EAD denotes Exposure at Default
- D(t,i) denotes the discount rate at time t (based on the Effective Interest Rate, for the different cashflow maturities i
- F
_{t}denotes the subjective but Forward-Looking Information set used formulate the estimate at time t - P denotes the subjective assignment of default probabilities to the events d
_{i}

This formula captures the essence of the definition, in practice evaluation of the 12-month portion LECL may utilize a variety of simplified / approximate forms. A common simplification is the use of the concept of 1-year Probability of Default

## References

- ↑ IFRS Standard 9, Financial Instruments