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
granted
Transaction Cost = DIRECT ORIGINATION COST
 Indirect origination cost is treated as outright
expense
AMORTIZED COST = amount at which the loan
receivable is measured initially:
a. Minus principal repayment
b. Plus/minus cumulative amortization
c. Minus reduction for impairment

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