What do 12 month expected credit losses represent?

The 12-month expected credit losses represent the portion of lifetime expected credit losses that are anticipated to occur within the next 12 months. This concept is crucial in financial reporting, particularly under the expected credit loss model, which requires entities to assess the credit risk of financial instruments.

This approach distinguishes between short-term and long-term credit losses. By focusing on only the next 12 months, it allows financial institutions and companies to estimate the risk of default more accurately on an annual basis without necessitating a full lifetime assessment for all credit exposures. It aligns with a proactive risk management strategy, enabling organizations to set aside appropriate reserves against potential losses they foresee occurring within the next year.

The other options do not accurately represent the definition of 12-month expected credit losses, as some refer to lifetime losses entirely, which encompasses a broader time frame and does not isolate the expectations specifically tied to the next fiscal year.