Loans Receivable

Cards (21)

  • Loans Receivable
    A financial Asset arising from a loan granted by a bank or other financial institution to a borrower or client
  • Loans Receivable
    • 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 - Included in the initial measurement of the Loan Receivable
    • Indirect Origination Costs - Treated as Outright Expense
  • 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
  • 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
    + Amortization of the difference between initial carrying amount and principal amount
  • Initial Amount >Principal Amount
    - Amortization of the difference between initial carrying amount and principal amount
  • Origination Fees
    Fees charged by the bank against the borrower for the creation of the loan
  • Origination Fees
    • Include compensation for: a)Evaluating the borrower's financial condition
    • b)Evaluating guarantees, collateral and other security
    • 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
    1. Received from borrower - Recognized as unearned interest income and amortized over the term of the loan
    2. Not chargeable against the borrower - Known as "direct origination cost" which are deferred and also amortized over the term of loan
  • Offsetting: Origination Fees & Direct Origination Costs

    1. Origination Fees Received > Direct Origination Costs - Unearned Interest Income - Increase
    2. Origination Fees Received < Direct Origination Costs - Direct Origination Cost - Decrease
  • Amortization Table: Unearned Interest Income

    • Date
    • Interest Received
    • Interest Income
    • Amortization
    • Carrying Amount
  • Journal Entries
    1. To record the loan - Loans Receivable (@ Principal Amount) - Cash
    2. To record origination fees received - Cash - Unearned Interest Income
    3. To record direct origination costs incurred - Unearned Interest Income - Cash
    4. To record receipt of interest income - Cash - Interest Income
    5. To record amortization of unearned interest income - Unearned Interest Income - Cash
    6. To record full collection of loan - Cash - Loans Receivable (@ Principal Amount)
  • SFP Presentation
    Loans Receivable - Unearned Interest Income = Carrying Amount (which is actually the amortized cost)
  • 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
    • Probability-weighted outcome
    • Time value of money
    • Reasonable and supportable information
  • Measurement of Impairment
    1. PFRS 9 does not prescribe particular method of measuring expected credit losses
    2. An entity may use various sources of data both internal or entity-specific and external in measuring expected credit losses
    3. The carrying amount of the loan receivable shall be reduced either directly or through the use of an allowance account
  • Journal Entries
    1. To record Impairment Loss - Dr Loan Impairment Loss - Cr Interest Receivable (credited directly because collection is unlikely) - Cr Allowance for Loan Impairment
    2. To record cash collection - Dr Cash - Cr Loans Receivable
    3. To record interest income using effective interest method - Dr Allowance for Loan Impairment - Cr Interest Income
  • Three-stage impairment Loss
    • Stage 1 - Covers debt instruments that have not declined significantly in credit quality since initial recognition or have low credit risk - A 12-month expected credit loss is recognized
    • Stage 2 - Covers debt instruments that have declined significantly in credit quality since initial recognition but do not have objective evidence of impairment - A life-time expected credit loss is recognized
    • Stage 3 - Covers debt instruments that have objective evidence of impairment at reporting date - A life-time expected credit loss is recognized
  • 12-month VS lifetime expected credit loss

    • 12-month expected credit loss - The portion of the life time expected credit loss from default events that are possible within 12 months after the reporting period
    • Lifetime expected credit loss - The expected credit loss that results from all default events over the expected life of the instrument