Estimation of long-run averages (LRA) parameter for conversion factor (CCF)

Are there 2 available options for the calculation of LRA CCF? Or what is the correct approach?

The question is important for the purpose of new IRB models development. In Article 182(1)(a) of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2) it is mentioned that for the purpose of long-run averages (LRA) estimation, institutions should estimate conversion factors by facility grade or pool on the basis of the average realised conversion factors by facility grade or pool using the default weighted average resulting from all observed defaults within the data sources. The approach described in CRR for CCF is similar to the approach described for LGD in Article 181(1)(a): institutions shall estimate LGDs by facility grade or pool on the basis of the average realised LGDs by facility grade or pool using all observed defaults within the data sources (default weighted average). However, it could also be argued that LRA CCF calculation approach should follow LRA PD approach: the average realised CCFs should be computed as the arithmetic average of the yearly averages of realised CCFs in that period. It is unclear which approach is correct or whether both alternatives are available.