Credit losses that are expected to result from default events associated with financial instruments, financing commitments and financial guarantee contracts, and which are possible to take place within a specific timeframe (e.g., 12 months, lifetime, etc.) These losses are calculated as the entire credit loss on an asset weighted by the probability of it occurring within the set timeframe, not today but at a certain future date. Expected credit losses are the weighted average credit losses with the probability of default (PD) used as the weight.

In mainstream practice, an entity’s management is required to measure expected credit losses in an unbiased way, and by evaluating a range of possible outcomes. In so doing, it has to take into consideration the time value of money and collect reasonable and supportable information about past events, current conditions and construct reasonable and supportable forecasts of future events and economic conditions at the reporting date.