12-month risk approximation

12-month risk approximation as an estimate for change in lifetime risks from IFRS 9 Financial instruments. If the likey pattern of default is not concentrated a a specific point during the expected USDlife of a financial instruments, the change in risk of a default occurring over the next 12-months may often be a reasonable approximation for the change in risk of a default occurring over the expected remaining life of the financial instruments.

12-month risk approximation is one of three operational simplifications or reliefs to companies for assessment of credit risk, together with the low credit risk operational simplification and the past due status.


If the likely pattern of default is not concentrated at a specific point during the expected life of the financial instrument, the change in risk of a default occurring over the next 12-months may often be a reasonable approximation for the change in risk of a default occurring over the expected remaining life.

In these circumstances, the standard permits the use of a 12-month risk of a default occurring when determining whether credit risk has increased significantly since initial recognition, unless circumstances indicate that a lifetime assessment is necessary. [IFRS 9 B5.5.13]

In using the changes in risk of a default occurring over the next 12 months, the standard suggests that an entity need not prove that the outcome of a 12-month assessment would differ from that of a lifetime assessment.

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This is slightly less demanding than the 2013 ED which stated that ‘an entity may use the 12-month probability of a default occurring to determine whether credit risk has increased significantly since initial recognition if the information considered does not suggest that the outcome would differ’.

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The IASB noted that some entities use a 12-month probability of default measure for prudential regulatory requirements and these entities can continue to use their existing systems and methodologies as a starting point for determining significant increases in credit risk, thus reducing the costs of implementation.[IFRS 9 BC5.177 – BC5.178]

However, for some financial instruments, or in some circumstances, the use of changes in the risk of default occurring over the next 12 months may not be appropriate to determine whether lifetime ECLs should be recognised.

For a financial instrument with a maturity longer than 12 months, the standard gives the following examples: [IFRS 9 B5.5.14]

  • The financial instrument only has significant payment obligations beyond the next 12 months 12-month risk approximation 
  • Changes in relevant macroeconomic or other credit-related factors occur that are not adequately reflected in the risk of a default occurring in the next 12 months
  • Changes in credit-related factors only have an impact on the credit risk of the financial instrument (or have a more pronounced effect) beyond 12 months

This guidance implies that it is less appropriate to use changes in the 12-month risk of default for non-amortising debt instruments such as most bonds and interest-only mortgages. 12-month risk approximation 


12-month risk approximation

12-month risk approximation

In using the changes in risk of a default occurring over the next 12 months, the standard suggests that an entity need not prove that the outcome of a 12-month assessment would differ from that of a lifetime assessment. This is slightly less demanding than the 2013 ED which state

d that ‘an entity may use the 12-month probability of a default occurring to determine whether credit risk has increased significantly since initial recognition if the information considered does not suggest that the outcome would differ’. In using the changes in risk of a default occurring over the next 12 months, the standard suggests that an entity need not prove that the outcome of a 12-month assessment would differ from that of a lifetime assessment. In using the changes in risk of a default 

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