LOANS RECEIVABLE
Loan Receivable –a financial asset arising from a loan granted by a bank or other financial institution to
a borrower or client.
INITIAL MEASUREMENT SUBSEQUENT MEASUREMENT
At fair value plus transaction costs that are At amortized cost using the effective interest
directly attributable to the acquisition of the method
financial asset
FAIR VALUE = Transaction price/amount of loan AMORTIZED COST = amount at which the loan
granted receivable is measured initially:
a. Minus principal repayment
Transaction Cost = DIRECT ORIGINATION COST b. Plus/minus cumulative amortization
Indirect origination cost is treated as outright c. Minus reduction for impairment
expense
ORIGINATION FEES
Fees charged by the bank against the borrower for the creation of the loan
Recognized as unearned interest income and amortized over the term of the loan
If fees are not charged against the borrower, they become direct origination cost
Origination Fees fees for loan creation by bank charged against the borrower
Direct Origination Cost fees for loan creation by bank not chargeable against the borrower
Origination fees and Origination cost may be offset against one another
Origination Fees > Direct Origination Cost difference is unearned interest income and
amortization will increase interest income
Origination Fees < Direct Origination Cost difference is charged to direct origination cost
and amortization will decrease interest income
Computation:
Principal Amount P xx
Add: Direct Origination Cost incurred xx
Less: Origination Fees ( xx)
Initial carrying amount of loan P xx
Journal Entries:
1. To record loan
Loan Receivable xx
Cash xx
2. To record origination fees received
Cash xx
Unearned interest income xx
3. To record the direct origination cost incurred
Unearned interest income/Direct origination cost xx
Cash xx
Computations to remember:
Interest Received P xx Carrying amount (Year X) P xx
Interest Income ( xx) OR Carrying amount (Year X-1) ( xx)
Amortization P xx Amortization P xx
Carrying amount P xx
Face amount/principal ( xx)
Unearned interest income P xx
*Initial carrying amount x effective rate = Interest income
*Principal rate x nominal rate = Interest received
LOAN IMPAIRMENT
An entity shall record/recognize a loss allowance for expected credit losses on financial asset
measured at amortized cost
Measurement
IMPAIRMENT LOSS is measured as the difference between the carrying amount and the present
value of estimated future cash flows discounted at the original effective rate.
Carrying amount of the loan receivable shall be reduced either directly or through the use of an
allowance account.
Example:
International Bank loaned P5,000,000 to Bankard Company on January 1, 2015. Terms are: Annual
payment of P1,000,000 for 5 years plus 10% interest. First principal and interest payment is due on
December 31, 2015. Bankard Company made the required payments on 2015 and 2016; however on
December 31,2017, International Bank assessed that remaining principal payments will be collected but
collection of interest is unlikely.
Loan Receivable has a carrying amount of P3,300,000 including accrued interest of P300,000 on
December 31, 2017. Cashflows projected from loan on December 31, 2017:
Dec ember 31, 2018 P 500,000
December 31, 2019 P1,000,000
December 31, 2020 P1,500,000
Use 10% effective rate. PV of 1 for one period is 0.9091, for 2 periods is 0.8264, for 3 periods is
0.7513
SOLUTION:
Carrying amount P3,300,000
Present Value of Cash flows:
2018: (500,000 x .9091) P 454,550
2019: (1,000,000 x .8264) 826,400
2020: (1,500,000 x .7513) 1,126,953 (2,407,900)
Impairment Loss P 892,100
JOURNAL ENTRY (December 31, 2017):
Loan Impairment Loss 892,100
Accrued interest receivable 300,000
Allowance for loan impairment 592,100
FS PRESENTAION (December 31, 2017):
Loan Receivable P3,000,000
Less: Allowance for loan impairment ( 592,100)
Carrying Amount P2,407,900
JOURNAL ENTRY (December 31, 2018):
Cash 500,000
Loan Receivable 500,000
Allowance for loan impairment 240,790
Interest income * 240,790
*PV of future cash flows (2,407,900) x Effective rate (10%) = P240,790
FS PRESENTATION (December 31, 2018):
Loan Receivable (3,000,000 – 500,000) P2,500,000
Less: Allowance for loan impairment (592,100 – 240,790) ( 351,310)
Carrying amount P2,148,690
