# Expected Life

## Definition

Expected Life in the context of IFRS 9 denotes an estimated time interval over which a financial instrument is subject to Credit Loss. Expected life is estimated by considering cash flows taking into account all contractual terms of the financial instrument (for example, prepayment, extension, call and similar options).

The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if that longer period is consistent with business practice[1]

There is a presumption that the expected life of a financial instrument can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the expected life of a financial instrument, the entity shall use the remaining contractual term (Maturity) of the financial instrument.

## Context

• Many financial instruments involve Competing Risks for example are also subject to Prepayment Risk. For the purposes of estimating Expected Credit Loss the IFRS 9 standard aims to contain these complexities
• Use of the expected life of an instrument for ECL purposes differentiates the IFRS 9 accounting standard from the Basel II regulatory standard that focuses on 1-year risk estimates. For many instruments the 1-year period can be considerably lower than the expected life

## Undrawn Commitments

Some financial instruments include both a loan and an undrawn commitment component and the entity’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity’s exposure to credit losses to the contractual notice period. For such financial instruments, and only those financial instruments, the entity shall measure expected credit losses over the period that the entity is exposed to credit risk and expected credit losses would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period[2]

## Notation

In the context of a Credit Network model, each asset has an expected life ${\displaystyle T_{i}\in [t+1,T]}$, that is, each asset has an expected life of least of one period and (at maximum) an expected life of ${\displaystyle T_{M}}$. Maturities in between timepoints are assumed mapped to the nearest one.