Loss Identification Period
The Loss Identification Period (abbreviated: LIP) is a factor in the calculation of the portfolio value adjustment according to IAS / IFRS and the calculation of the "incurred loss", a key figure in the IAS accounting standard. It describes the period from the default of the borrower to the perception of the default by the credit institution.
definition
For risk determination according to IAS, the period between the occurrence and the discovery of the loss event must be used.
Specifically, this means that there is a time interval between the occurrence of a loss event for the borrower and identification by a credit institution as part of the individual assessment. This time interval or the period from the failure of the borrower to the perception of this failure by the credit institution is known as the "Loss Identification Period" (LIP).
The LIP is max. "1" (= one year). Auditors generally do not accept longer periods.
Portfolio value adjustment formula
PoWB = max {IA - S * EQ, 0.0} * (1 - EBQ) * PD * LIP
- IA = total gross drawdown + irrevocable loan commitments
- S = collateral
- EQ = recovery rate
- EBQ = recovery rate
- PD = Probability of Default
- LIP = "Loss Identification Period" = actual but not yet known failure at the time of observation