The credit spread (additional compensation or premium) that is net of an estimate of credit risk (default risk). Credit risk premia reflect the prices for bearing, or having exposure to, corporate default risk in excess of expected default losses. Credit risk is 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. 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).