Precious Grace Ann R.

Loja IA1 April 13, 2020

Chapter Summary of Loan Receivable

A loan receivable is a financial asset arising from a loan granted by a bank or other
financial institution to a borrower or client and the repayment periods cover several
years.

Initial measurement of loan receivable

An entity shall measure a loan receivable at fair value (transaction price) plus
transaction costs (including direct origination costs however indirect origination costs
should be treated as outright expense) that are directly attributable to the acquisition of
the financial asset.

Subsequent to initial measurement

Loan receivable shall be measured at amortized cost using the effective interest
method.

If the initial amount recognized is lower than the principal amount, the amortization of
the difference is added to the carrying amount.

If the initial amount recognized is higher than the principal amount, the amortization of
the difference is deducted from the carrying amount.

Origination fees:

 Are the fees charged by the bank against the borrower for the creation of the loan
 Also includes compensation for the activities such as evaluating the borrower’s
financial condition, evaluating guarantees, collateral and other security, negotiating
the terms of the loan, preparing and processing documents and closing the loan
transaction
 If received from the borrower are recognized as unearned interest income and
amortized over the term of the loan
 If not chargeable against the borrower, the fees are known as direct origination costs
which will be deferred and also amortized over the term of the loan
 If received and it exceeds the direct origination costs, the difference is unearned
interest income and the amortization will increase interest income
 If direct origination costs exceed the origination fees received the difference is
charged to direct and the amortization will decrease interest income
Illustration from Financial Accounting 2013 by Valix, Problem 8-2 (IFRS)

Nasty Bank granted a loan to a borrower on January 1, 2013. The interest on the loan is
10% payable annually starting December 31, 2013. The loan matures in three years on
December 31, 2015. Data related to the loan are:

Principal amount 4,000,000

Origination fees charged against a borrower 342,100
Direct origination cost incurred 150,000

After considering the origination fees charged against a borrower and the direct
origination cost incurred, the effective rate on the loan is 12%

Given:
Nominal rate 10%
n 3 years (annually)

Computation:

Principal amount 4,000,000

Origination fees charged against a borrower (342,100)
Direct origination cost incurred 150,000

Initial carrying amount of loan 3,807,900

Journal entries on January 1, 2013

Date Account Titles Debit Credit

Jan. 1, 3013 Loan Receivable P 4,000,000
Cash P 4,000,000
To record the loan

Unearned interest income 342,100

Cash 342,100
To record the origination fees
charged to the borrower

Unearned interest income 150,000

Cash 150,000
To record the direct origination costs
incurred by the bank

Accordingly, the present value of the cash flow is determined as follows:

Principal Amount 4,000,000.00
Origination fees charged -342,100
Direct origination cost 150,000
Initial Carrying Amount 3,807,900.00

Nominal rate 10%

Terms of the loan 3 years
Date of loan Jan. 1, 2013

PV of Principal (4,000,000 * PV of 1 factor)

PV of Interest (4,000,000 *10%* PV of OA factor)
Total Present Value

11% PV 0.731191381
11% PVOA 2.443714715
12% PV 0.711780248
12% PVOA 2.401831268

11% 12%
2,924,765.53 2,847,120.99
977,485.89 960,732.51
3,902,251.41 3,807,853.50

11% 3,902,251.41 94,351.41 * 1 + 11= 11.99950739

x% 3,807,900.00 94,397.91 11.99%
12% 3,807,853.50

Amortization Table

Interest Interest Carrying

Date Received Income Amortization Amount
Jan. 1, 2013 3,807,900.00
Dec. 31, 2013 400,000 456,567.21 56,567.21 3,864,467.21
Dec. 31, 2014 400,000 463,349.62 63,349.62 3,927,816.83
Dec. 31, 2015 400,000 472,183.17 72,183.17 4,000,000.00
Total 192,100.00
Impairment of loan

PAS 39, paragraph 58, provides that an entity shall assess at every end of reporting
period whether there is objective evidence that a financial asset or group of financial
assets is impaired.

Objective evidence of impairment may result from certain “loss events” occurring after
the initial recognition of the financial asset.

Illustration from Financial Accounting 2013 by Valix, Problem 8-4 (IAA)

Solvent Bank loaned P 10,000,000 to a borrower on January 1, 2011. The terms of the
loan require principal payments of P 2,000,000 each year for 5 years plus interest at
8%. The first principal and interest payment is due on December 31, 2011 and
December 31, 2012. However, during 2013 the borrower began to experience financial
difficulties, requiring the bank to reassess the collectability of the loan.

Date of cash flow Amount projected

December 31, 2014 1,000,000

December 31, 2015 2,000,000
December 31, 2016 3,000,000

Solution:

Interest Annual Carrying

Date Received Payment Amount
Jan. 1, 2011 10,800,000.00
Dec. 31, 2011 160,000.00 2,000,000.00 8,640,000.00
Dec. 31, 2012 160,000.00 2,000,000.00 6,480,000.00
Dec. 31, 2013 Financial Difficulties
Dec. 31, 2014 1,000,000.00
Dec. 31, 2015 2,000,000.00
Dec. 31, 2016 3,000,000.00

Interest at 8%

PV of 1 for 1 period 0.925925926

PV of 1 for 2 periods 0.85733882
PV of 1 for 3 periods 0.793832241
Dec. 31, 2014 925,925.93
Dec. 31, 2015 1,714,677.64
Dec. 31, 2016 2,381,496.72
Total present value of cash flows 5,022,100.29

Carrying Amount 6,480,000.00

PV of cash flow 5,022,100.29
Impairment loss 1,457,899.71

Journal Entries
Dec. 31, 2013 Loan impairment loss 1,457,899.71
Accrued Interest Receivable 480,000.00
Allowance for loan impairment 977,899.71

On Dec. 31 3013, the loan receivable is shown as follows:

Loan Receivable 6,000,000.00

Allowance for loan impairment 977,899.71
Carrying Amount 5,022,100.29

Date Account Titles Debit Credit

Dec. 31, 2014 Cash 1,000,000.0
0
Loan Receivable 1,000,000.00
To record the cash
collection

Allowance for loan impairment 401,768.02

Interest Income 401,768.02
To record the interest
income

Dec. 31, 2015 Cash 2,000,000.0

0
Loan Receivable 2,000,000.00
To record the cash collection

Allowance for loan impairment 353,909.47

Interest Income 353,909.47
To record the interest income
Dec. 31, 2016 Cash 3,000,000.0
0
Loan Receivable 3,000,000.00
To record the cash collection

Allowance for loan impairment 222,222.22

Interest Income 222,222.22
To record the interest income