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    Loans Receivable: Valix, C. T. Et Al. Intermediate Accounting Volume 1. (2019) - Manila: GIC Enterprises & Co. Inc

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    Shergie Gozum
    Loans receivable arise from loans granted by financial institutions to borrowers. They are initially measured at fair value plus transaction costs and subsequently measured at amortized cost using the effective interest method. Origination fees received from borrowers offset direct origination costs incurred and are both amortized over the loan term. Impairment loss is recognized when expected future cash flows are lower than the carrying amount, with the loss calculated as the present value of cash shortfalls and allowance reduced accordingly.

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    Loans Receivable: Valix, C. T. Et Al. Intermediate Accounting Volume 1. (2019) - Manila: GIC Enterprises & Co. Inc

    Uploaded by

    Shergie Gozum
    420 views20 pages
    Loans receivable arise from loans granted by financial institutions to borrowers. They are initially measured at fair value plus transaction costs and subsequently measured at amortized cost using the effective interest method. Origination fees received from borrowers offset direct origination costs incurred and are both amortized over the loan term. Impairment loss is recognized when expected future cash flows are lower than the carrying amount, with the loss calculated as the present value of cash shortfalls and allowance reduced accordingly.

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    C7___Loans_Receivable

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    Loans receivable arise from loans granted by financial institutions to borrowers. They are initially measured at fair value plus transaction costs and subsequently measured at amortized cost using the effective interest method. Origination fees received from borrowers offset direct origination costs incurred and are both amortized over the loan term. Impairment loss is recognized when expected future cash flows are lower than the carrying amount, with the loss calculated as the present value of cash shortfalls and allowance reduced accordingly.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    420 views20 pages

    Loans Receivable: Valix, C. T. Et Al. Intermediate Accounting Volume 1. (2019) - Manila: GIC Enterprises & Co. Inc

    Uploaded by

    Shergie Gozum
    Loans receivable arise from loans granted by financial institutions to borrowers. They are initially measured at fair value plus transaction costs and subsequently measured at amortized cost using the effective interest method. Origination fees received from borrowers offset direct origination costs incurred and are both amortized over the loan term. Impairment loss is recognized when expected future cash flows are lower than the carrying amount, with the loss calculated as the present value of cash shortfalls and allowance reduced accordingly.

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    © All Rights Reserved
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    Download as pdf or txt
    of 20

    LOANS RECEIVABLE

    Valix, C. T. et al. Intermediate Accounting Volume 1. (2019). Manila: GIC


    Enterprises & Co.; Inc.
    Loans Receivable

     A financial Asset arising from a loan granted by a bank


    or other financial institution to a borrower or client.
     The term of the loan may be short-term but in most
    cases the repayment periods cover several years.
    Initial Measurement of Loans
    Receivable
    Fair Value
    + Transaction Costs directly attributable to acquisition including Direct
    Origination Costs

    = Loans Receivable = Transaction Price = Amount of Loan Granted

    Origination Costs
    Direct Origination Costs Indirect Origination Costs
    Included in the initial measurement of Treated as Outright Expense
    the Loan Receivable
    Subsequent Measurement of Loans
    Receivable (PFRS 9, par. 4.1.2)
     If the business model in managing financial asset is to
    collect contractual cash flows on specified dates and
    the contractual cash flows are solely payments of
    principal and interest, the financial asset shall be
    measured at amortized cost.
     Accordingly, loans receivable is measured at
    AMORTIZED COST using the effective interest method.
    Amortized Cost
    Amount at which L/R is measured initially
    ― Principal payment
    ± Cumulative amortization of any difference between the initial
    carrying amount and the principal maturity amount
    ― Reduction for impairment or uncollectibility
    = Amortized cost

    Initial Amount < Principal Amount Initial Amount > Principal Amount
    + Amortization of the difference ― Amortization of the difference
    between initial carrying amount and between initial carrying amount and
    principal amount principal amount
    Origination Fees

     Lending activities usually precede the actual


    disbursements of funds and generally include efforts to
    identify and attract potential borrowers and to originate
    a loan.
     The fees charged by the bank against the borrower for
    the creation of the loan are known as “origination fees”.
    Origination Fees

     Include compensation for the following activities:


    a)Evaluating the borrower’s financial condition
    b)Evaluating guarantees, collateral and other security
    c) Negotiating the terms of the loan
    d)Preparing and processing the documents related to the
    loan
    e) Closing and approving the loan transaction
    Accounting for Origination Fees
    Scenario Accounting Treatment
    Received from borrower Recognized as unearned interest
    income and amortized over the term
    of the loan
    Not chargeable against the borrower Known as “direct origination cost”
    which are deferred and also
    amortized over the term of loan

    OFFSET
    Unearned Origination Fees Received
    ― Direct Origination Fees
    Offsetting: Origination Fees & Direct
    Origination Costs
    Scenario Accounting Treatment for Effect of
    the Difference which will Amortization on
    be amortized Interest Income
    Origination Fees Received Unearned Interest Increase
    >
    Direct Origination Costs Income

    Origination Fees Received Direct Origination Cost Decrease


    <
    Direct Origination Costs

    Again, origination fees received and the direct origination


    costs are included in the measurement of the Loans
    Receivable.
    Journal Entries
    To record the loan
    Loans Receivable (@ Principal Amount) xxx
    Cash xxx

    To record origination fees received


    Cash xxx
    Unearned Interest Income xxx

    To record direct origination costs incurred


    Unearned Interest Income xxx
    Cash xxx
    Amortization Table: Unearned Interest
    Income (Example given: page 172)
    Date Interest Interest Amortization Carrying
    Received Income Amount
    Jan 01 2019 4,768,200
    Dec 31 2019 600,000 667,548 67,458 4,835,748

    Principal Initial
    x Nominal Rate Measurement
    CA
    x Effective rate Int. Received
    - Int. Income Previous CA Bal
    - Amortization
    Journal Entries
    To record receipt of interest income
    Cash xxx
    Interest Income xxx

    To record amortization of unearned interest income


    Unearned Interest Income xxx
    Cash xxx

    To record full collection of loan


    Cash xxx
    Loans Receivable (@ Principal Amount) xxx
    SFP Presentation

    Loans Receivable xxx


    Unearned Interest Income (xxx)
    Carrying Amount (which is actually the
    amortized cost) xxx
    Impairment of Loan
    (PFRS 9, par. 5.5.1& par. 5.5.3)

     An entity shall recognize a loss allowance for expected


    credit losses on financial asset measured at amortized
    cost.
     An entity shall measure the loss allowance for a financial
    instrument at an amount equal to the lifetime expected
    credit losses if the credit risk on that financial instrument
    has increased significantly since initial recognition.
     Credit Losses = PV of all Cash Shortfalls
     Expected Credit Losses are an estimated of credit losses
    over the life of the financial instrument
    Measurement of Impairment

    Items to consider Description


    ✓ Probability-weighted Estimate should reflect the
    outcome possibility that a credit loss
    occurs and the possibility that no
    credit loss occurs
    ✓ Time value of money Expected credit losses should be
    discounted
    ✓ Reasonable and Available without undue cost or
    supportable effort
    information
    Measurement of Impairment

     PFRS 9 does not prescribe particular method of


    measuring expected credit losses.
     An entity may use various sources of data both internal
    or entity-specific and external in measuring expected
    credit losses.
    Carrying Amount of L/R xxx
    ― PV of estimated future cash flows discounted at
    the original effective rate xxx
    = Impairment Loss xxx

     The carrying amount of the loan receivable shall be


    reduced either directly or through the use of an
    allowance account.
    Journal Entries
    To record Impairment Loss
    Loan Impairment Loss xxx
    Interest Receivable (credited directly because xxx
    collection is unlikely)
    Allowance for Loan Impairment

    To record cash collection


    Cash xxx
    Loans Receivable xxx

    To record interest income using effective interest method


    Allowance for Loan Impairment xxx
    Interest Income xxx
    Three-stage impairment Loss

    Covers debt instruments that Covers debt instruments that Covers debt instruments that
    have not declined significantly have declined significantly in have objective evidence of
    in credit quality since initial credit quality since initial impairment at reporting date.
    recognition or have low credit recognition but do not have
    risk. objective evidence of
    impairment.
    A 12-month expected credit A life-time expected credit loss A life-time expected credit loss
    loss is recognized. is recognized. is recognized.
    There is a rebuttable
    presumption that there is a Interest income is computed
    significant increase in credit based on *net carrying amount
    risk if the contractual payments
    are more than 30 days past *Net carrying amount = gross
    due carrying amount or face
    Interest income is computed based on the gross carrying amount – allowance for credit
    amount or face value. loss
    12-month VS lifetime expected credit
    loss
    12-month expected credit Lifetime expected credit loss
    loss
    The portion of the life time The expected credit loss that
    expected credit loss from results from all default events
    default events that are over the expected life of the
    possible within 12 months instrument.
    after the reporting period. Shall always be recognized
    for trade receivables
    through aging, percentage
    of A/R and percentage of
    Sales.
    End of Chapter

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