Which financial concept involves estimating future losses due to defaults?

The financial concept that involves estimating future losses due to defaults is the 12-month expected credit losses. This approach is part of the International Financial Reporting Standard (IFRS 9) which focuses on a forward-looking model for credit loss provisioning. Under this model, entities are required to estimate potential credit losses that could arise from default events that are likely to occur within the next 12 months. This proactive measure aims to align financial reporting with the economic reality of credit risk, leading to more accurate and timely recognition of potential losses.

Estimating these expected credit losses helps companies to better understand and manage their credit risk exposures, ensuring that they have adequate reserves to cover this anticipated risk. This reflects a significant shift from traditional loss recognition, where provisions were often made only when a loss event had occurred, thereby potentially leading to underreporting of risks.

In contrast, accrued liabilities pertain to expenses that have been incurred but not yet paid, while financial asset amortization relates to the gradual write-off of the value of an asset over time. Actuarial forecasting generally involves the statistical analysis of trends to predict future events, often used in the context of insurance and pension plans, but does not specifically target estimating losses due to defaults on financial instruments.