EAD is equal to the current amount outstanding in case of fixed exposures such as term loans.
Based on Basel Guidelines, EAD for commitments measures the amount of the facility that is likely to be drawn further if a default occurs.
On-balance sheet netting of loans and deposits of a bank to a corporate counterparty is permitted to reduce the estimate of EAD under certain conditions.
For off-balance sheet items, there are two broad types which the IRB approach needs to address: transactions with uncertain future drawdown, such as commitments and revolving credits, and OTC foreign exchange, interest rate and equity derivative contracts.
All estimates of EAD should be calculated net of any specific provisions a bank may have raised against an exposure.