The risk that a financial loss will be incurred by a party to a financial instrument (or broadly any financial arrangement) due to failure by the other party to discharge an obligation. For example, credit risk takes the form of potential loss that may arise due to failure by a borrower to repay a loan. More specifically, it is the risk that a lender is exposed to, as reflected in the negative impact on its cash flows (contractual interest payment and principal repayment) when a borrower does not pay either fully or timely.

In accounting practice, the assessment of credit risk is essential for measuring expected credit losses (ECLs) associated with financial instruments. An entity is required to assess, at each reporting date, whether the credit risk on a financial instrument has experienced a significant increase (the so-called significant increase in credit risk, or for short SICR) since initial recognition.

In case of SICR, an entity is to recognize expected credit losses (ECLs) over the expected life of the instrument/ arrangement. Otherwise, ECLs will only cover the next 12 months of the life of the exposure. Credit risk assessment also includes assessing whether an exposure is credit-impaired or not (impairment/ impairment loss).