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Loan Receivable

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52 views10 pages

Loan Receivable

Uploaded by

Gabrielle Vapor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 7 LOAN RECEIVABLE TECHNICAL KNOWLEDGE To understand the initial measurement of loan receivable, To understand the subsequent measurement of loan receivable, To recognize the impairment of loan receivable. To describe the three-stage approach of loan impairment. 190 Definition ‘A loan recoivable is a financial asset arising from a loan ‘granted by a bank or other financial institution toa borrower of dliont. ‘The term of the loan may be short-term but in most cass, the repayment periods eover saveral years. measurement of loan receivable Ini |At initial recognition, an entity ehall measure a loan receivable at fair value plus transaction costs that are directly atfributable tothe acquisition of the financial asset. ‘The fair value of the loan receivable at initial recognition is normally the transaction prie, meaning, the amount of the Joan granted, ‘Transaction costs that are directly attributable to the Joan receivable include direct origination eosts. Direct origination coste should be included in the initial ‘measurement of the loan receivable. However, indirect origination costs should bo treated as outright expense. Subsequent measurement of loan receivable PERS 9, paragraph 4.1.2, provides thet if the business model in managing financial assetisto collect contractual eash lows ‘on specified dates and the contractual cash flows are solely payments of principal and interest, the financial asst shall be measured at amortized cost Accordingly, a loan receivableis measured at amortized cost using the effective interest method 11 ‘Meaning of amortized cost ‘The omortzed eos the amount at which the loan receival is moesured initially: | Minus principal repayment , Plus or minus cumulativo amortization of any difference ‘between the initial corrying amount and the prineipal maturity amount Minus reduction for impairment or uncolletbility nother words ithe initial amount ecognized is lower than the principal amount, the amortization of the difference is added to the earrying amount. 1 the inital amount recognized is higher than the principal amount, the smortztion of the diference is deducted from the carving amount Origination fees Lending activites usualy preseds the actu disbursement funds and generally include eft to identity and attract potential borers snd to originate loa ‘The fees charged by the bank against the borrower for the creation ofthe loan are known as "origination fees". Origination jes include compensation for the following activities: 4. Evaluating the borrower's financial condition », Bralusting guarantees, collateral and other security Negotiating the terms of the loan 4 Proparing and proseting the documents related to the ‘© Cling and approving the loan transection 192 Accounting for origination fees ‘The origination fees received from borrower are recognized faa unearned interest income and amortized over the term of the loa. If the origination foes are not chargeable agsinst the ‘borrower, the foes are known ae “direct origination cont. ‘The direct origination costa are deferred and also amortized over the term of the loan. Preferably, the direct origination costs are offset directly against any unearned origination fes received. Ifthe origination fees received exceed the direct origination costs, the difference is unearned interest income and the ‘amortization will increase interest income, If the direct origination costs exeoed the origination foes received, the difference is charged to iret origination costs’ ‘and the amortization will decrease interest income. ‘Accordingly, the origination fees received and the direct origination costs are included in the measurement ofthe loan receivable. Illustration Global Bank granted a loan toa borrower oa January ‘The interest on the loan is 12% payable ennually starting December 31, 2020. The loan matures in three years om ‘December 31, 2022, Principal amount ‘soona00 Origination fee received from borrower "31,80 Direct origination enetsincured 10000 Initial carrying amount of the loan Principal amount 5,000,000 Origination ees recoived $C 381300) Direct origination costs incurred ‘\tov'o00 Titial carrying amount ofloas 47168,200 198 Journal entries on January 1, 2020 To record the loa Loan ecsivable 5.000.000 ‘Cash 50,000, 2. To record the origination fees received from the cath 3100 ‘Unsarndintretinceme 81,800 3. To rocord the direct origination coste incurred by the bank: Unearnedinterestinome 100,000 ‘Ca 110,000 ‘Thus, the unearned interest income has credit balance of 'P231,800 tobe amortized over the term of the loan using the offective interest method, Because of the origination fees ressived and the direct origination costs, anew effective rate must be computed, ‘Since the initial carrying amount of the loan receivable of 'P4,768,200 ie lower thon the prinspal amount, it means there is a discount and therefore the effective rate must be higher ‘than the nominal rate of 12%. ‘After considering the origination fee received from the borrower and the direct origination ens, the effective interest rate is determined to be 14, ‘Amortization table ~ effective interest method test athe Casi reosived income Amortization mount 7.200 snow ons! enaey $8808, Sinow Stes oR” Sn 8S ‘eoncoo 6ar24T ~—_247 5,000,000 ae 4 Effective interest method Interest received Interest income Principal times nominal rate (Canying amount timer effoctive rato December 31,2020 Interestreeived (6,000,000 x 124) (Carrying amount —Decamber 31, 2020 December 31,2021 Interastreceived eon ec0 Intorestineome (4,895,148 x 14%) srr005 ‘Amortization ‘7.008 (Carrying amount -Decomber 31, 2020 4885748 Carrying amount -December 31, 2021, 92.763 December 31,2022 : Interest received Interest income ‘Amortization Carzying amount December 81,2021 Carrying amount -December 1, 2022 * 4,912,763 x 14% cquale POST, 785. Ther is a dferenc of PSS due to rounding of present value factors. Journal entries on December 31, 2020 Cash 000 Titerest income nc00 ‘Unearned interest income ors Thteretinome ase 195 ‘Statement presentation on December 31, 2020 Loanrosivale 5,000.00 ‘neared inerestincome (28100-67548) 164.259 (Ceryng amount ~Decenber 1, 2020 As 708 x ‘The carrying amount is actully the amortized cost ‘Journal entries on December 31, 2021 0.00 Inetiname 00.000 ‘nearettetinone nots 4 ieee 08 ‘Journal entries on December 81, 2022 cut sonoca Taeanticae oman Unerndintnatincome sian tenes sre ‘000000 nestle ‘5000000 Impairment of loan PPRS 9, paragraph 5.5.1, provides that an entity shall recognize loss allowance for expected credit losses on nancial asset measured at amortized cost Paragraph 5.5: provides that an entity shall measure the loss allowance fora financial instrument at an amount equal to the lifetime expected eredit losses if tho ‘eredit risk on ‘hat financial instrument has incroaved signifieantly since {initial recognition, Credit losses are the present value ofall cash shortfall ‘Expected credit losses are an estimate of eredit losses over the life ofthe financial instrument, ‘Measurement of impairment When measuring expestd credit ote, an entity shoud a. The probobilty weighed oucome ‘The estimate should reflect the possiblity that a credit Jos occurs and tho pecebility tat no ere oss ours. b. The time value of maney ‘Tho expected credit loses should be dieeounted Reasonable ond eupportale information that i available tthout undue coor fee PERS 9 does not proscribe partiular method of measurin expected credit loses, a [An entity may use various sources of deta both internal or grly-eporie an ermal in easing expe red ‘The amount of impairment oss can be measured as the ifference betseen the carrying omaunt and the present value of estimated future cask Hows discounted at the original Sfective rote. ‘The carrying amount of the laa resivable shall be reduced ‘ither ditectly or through the ws of an allowance account Meaning of credit risk Credit rise isthe risk ha one party oo financial igtrament Hl couse @ isco! lee oe eer bay by lang Eachange on obligation. ‘The risk contemplated isthe risk thatthe issuer will fail to ‘perform a particular obligation ‘The risk does not necesserily clate to the eredit worthiness of the issuer. For example, if an entity issued a collateralized liability and noneollateralized liability that are otherwise identical, the tredit risk of the two libiities wil be different. ‘The credit risk of the collateralized liability is surely less ‘han the eredit risk of the noncollatealized liability. ‘The credit risk for a cllateralized lability may be zero, 197 Illustration as International Bank lened P5,000,000 to Bankar Company ‘on January 1, 2018, ‘The terme ofthe loan require principal payment of P1,000,000 teach year for 8 years plus interest at 10%. ‘The first principal and interest payment is due on December 81, 2018. Bankard Compeny made tho required paymenta on ‘December 31, 2018 and December 3, 2019. However daring 2020, Benkard Company began to experience financial difficulties and was uncble to make tho required principal and interest payiyent on December 31, 2020, On December 31, 2020,Yinternational Bank assessed the collectibility of the loan and has dotermined that the remaining principal payments will be collected but the collection of the interest is unlikely. ‘The loan receivable has carrying amount of P3,800,000 including the acrued interest of P300,000 on December 31, 2020. International Benk projected the cash flows from the Ioan on December 31, 2020. Date of cashflow Amount projected ‘Using the original effoctive rate of 10%, the present value of Lis 9091 fr one period, 8264 fortwo periods nnd 7513 for three periods. Present value of the cash flows Deceiber81,2091 ( 500000 9093)(116)" 454,880 December 312taz C0000 60%.0)°2 326,400 December 31,2023 (1.500000x.7519}Cn4i)?, 1,196,950 ‘ToalprosentvalucofeathQows 2.407.900 198 Computation of impairment loss sizipaifment loss is the difference botmoen the carrying Srmount of the loan and the present vale ofthe cash flaws Corringamountofloan 13,900,000 Pretent value of ah lowe 207900 / Irmpsirmentloes 92,100 Journal entry on December 81, 2020 ‘Loan impairment locs 2100 “Acerud interest recivable 0000 Allowance for loan impairment e200, ‘The accrued interest receivable is credited directly because the collection of intoroct is unlikely, ‘Statement presentation on December 31, 2020 Loan receivable ‘sc0qo00 ‘Allowance for loan impairent C0100) Carryingamount Journal entries on December 31, 2021 A. To record the cash collection: Cash 000 Loan receivable 00000 2 To record the interest income using the efetive interest "method: Allowance forloanimpairment 240790 Tnterestincome 210700 “The interest income for 2021 is computed by multiplying the carrying amount of the loan by the effective rate. ‘Thus, P2,407,900 times 10% equals P240,790. / Note that the recognition of interest income is charged against the allowance for loan impairment account. 199 Journal entries on December 31, 2022 1. To record the eat colletion: \ ost 24000 ‘asa retvale 2 ‘To record the interest income: Allowane fran npaiment 1,000,000 s14s69 214809 Loan reciabie-Decenters,anat (2°96 - SAH 2,500,000 ‘Alliance forloanimpatrent(92100-240,790) (851,510 (Carrying amount December $1, 2021 2,148,690 Interestinsme for 2032 (105 32,148,0%) 214,860 Sournal entries on December 31, 2028, 1 To record the final cash collection: cab, 1.50000 Voanrecsivable 1,500,000 2 To record the interest income: Alowancferlomninpsineent 188441 Totzestincome 136,441 Lr resnble-Déceaber di 2022 (25118 8098)1.50,000 7 ‘Aswan ran apeiaent @81910~214860) —“(TOGAAD) Cenyingampunt~Deoomber 31,2022 Interetincome for 2028 (10% 136,586) 196,356 ‘There isa difference of P86 between P136,441 and P136,356 due to rounding of present value factors Another illustration UUsban Bank granted lon f P300,000 to a brewer on January 1, 2020, The terms of the loan were payment in fal ‘on December 31, 2025 plus annval interest payment at 8% (very December 31. Tho iret intrest payment was made on ocember 81, 2020. ‘On December 31, 2020'Sae to financial difficulties, the Grape inforue’ Gehan Bank ot pea would miss ‘pe ttoest pupsents the neat twa year, After that, the borrower expect to resume the annual {iterest payment but the principal would be paid oa RSISDS PAY "O06 or one year as wi tere Jud Preteen ‘Schedule of payments from the borrower Desember 31,2021 Noiatereet payment ° ‘December 31, 2022 Nointeret payment ° Decamber 31, 2023.tnteres payment @Sx5 000,000) 210000 Decombar 31, 2094 Interest payaso! acco December 31,2025 Interest paymest zane ‘December 81; 2028 Intoret payment 2en00 Prinspal payment 3000000 Using the original fective intorat rate of 8%, the prosent value of 1 is 794 for three periods, 735 fr four periods, 681 for five poricds, and .630 for aix periods Computation ‘The present value of the future interest and principal payments can then be computed as fllows: December 31,2023 ( 240,000x.784) (us8)? December 31,2024 ( 240,000%.758) (.-8)~+ December 81,2025 ( 240,000%.681) (1:8) December 1, 2026 (3.240000 630) (iss)-¢ ‘otal present value ofloan Carrying amount ofloanequsltoprincipal only ‘Because there is no accrued interest on December $1, 2020 Present value offoan Impairment loss 201 Souralenrie = ‘8,000,000, Be sageie : a 3.0004 ‘Dec. 31 Cash 240,000 ‘onatinone 240000 3 eanipsioment on 00 ‘Allowance loan impairment 428,400 be for oan’ 206,728. Be 31 Alpwncerkaninpsimmest 206 Tnerestincone (32871,600) 205,728, aoe Bie 51 Alowanatraniaprimet 222002" ‘etionee ans Lemmreintie-Desabesi2ta1 3000000 Niteles rien a (mor Cerminganras-Desember,2081 2777928, + ne 277758 eqs a2,188 differen of Pebcncormndogs tones St tat he lowans rts inpairent i amertizod ive teo gece tsa Sl heeace ie dang aes hc heewe nate dle od Be a1 cas a0 Tmewtinene 210,000 i Bata cus Sai Teretinsne 2000 os Bes. can aa iSerencne side 016 Dee st cat s.2sea00 nrc ia Pree uno 202 ‘qThree-stage impairment approach age 1 ~ This stage covers debt instruments that have not Sta T ectinedsigniiconlyin ered quality ence inital ‘recognition or that have low credit Fisk [Pnder this senar, a 12:nonh expected eet Toso is recognice stage 2 — This stage covers debt instruments that have declined: yin cre quality since intial recognition but do not havo objective evidence of impairment Under this scenario, a liftime expec ereit lose is recognized ‘There is rebutable presumption that there ia a significant increase in credit risk if the epntractual payments ore mare than 30 dae post Stage 3 — This stage covets debt instruments that have active evidence of mpatmen a ihe epotng Under this scenario, lifetime eset ert oss Is recognized 12-month expected credit loss ‘A 12:month expected ered os i defined os the portion of the lifetime expected credit lose from default events that fre possible within 12 months after the reporting period Lifetime expected credit loss Lifetime expected credit loss is defined asthe expected credit Joss that rovults from all default events over the expected life of the instrument. Lifetime expected credit los shall sways be recognized for {rade recevvables throwga apg, Derontegy of secon Heeeivable and percentage of sale Interest income a. Under siages 1 and 2, interest income is computed based fon the gross carrying amount or face amount b. Under stage 3, interest income is computed based on the nel carrying amount which is equal fo the face amount minus allowance for Ioan impairment 203 Stage 1 - Low credit risk On January 1, 2020, «bank loaned P2,000,000 to a borrower, ‘The contract specified an effective interest of 10%, a term of |, {8 years and interest is payable annually every December 31. On December $1, 2020, based on the most relevant information available, the bank determined that the loan hed 1 L2-month probability of default of 6% and expected to collect only 80% of the principal The present value of 1 at 10% for 7 periods is 0.51. Journal entries for 2020 Jan. 1 Loanzesivable 2.000.000 ‘Cash 2,000,000 Dec. $1 Cash (2,000,000 10%) 200,000 Tsereat inane 200,000 Impairment oes 9,200 “Allwancoforloenimpaircent CCerrying anount—Decemb 3, 2020, Probably af elecion| lath ow ‘Maltiply by PVof at 10%6for7 periods (.8)"7 resent valu of cath ow -Decomber 31,2020 (Carrying axount~Decenber 31,2000, Proven alu of expected cash Now ~Decomber 31,2020 ‘Expected crediloss ‘Maltpiyby probability offal within 12 monte % 12 month expected eet so Loan earinale Allowance frlsn impairment (Carrying smount—Desember 31,2020 204 Stage 2 ~- Significant increase in credit risk but ‘no objective evidence of impairment. (On December 31, 2021, the bank determined that there wae ‘a significant increase inthe credit risk ofthe loan receivable bbut no objective evidence of impairment. ‘The bank concluded thet thore ie a 40% probability of default over the remaining lif ofthe loan and the bank expected to collect only 70% of the principal balance. ‘The present value of 1 at 10% for 6 periods is 0.56. Journal entries for 2021 Dee $1 Cash 2a000 Tnterestinonme 00 31 Impairment oss e700 “Allowance frloanimpaiment, Carrying amount—December 31,2001 Probability of election Expected cash flow g Multiply by PV of Lat 10% for periods (uss) rodent value of expected cach fom Carrying amount~December 81,2021 Precong value of expected cash Dow ~ December 31, 2021 Bxpected credit loss ‘Multiply by probability of defeat within years Lifetime expected credit os allowance Unadjusted allowance December 1, 2020 Impairment oes Lean receivable Allowance for loan impairment ‘Carrying amount -DocomberSt, 2021 208 Stage 3 - Objective evidence of impairment On December 31, 2022, the borrower was in financia}

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