Notes Payable

Ms. Charmaine Soriano Buan, CPA

Technical Knowledge
▪To define promissory note.
▪To know the initial measurement of notes payable.
▪To know the subsequent measurement of notes payable at
amortized cost.
▪To understand the fair value option of measuring note payable.
▪To know the accounting for note payable issued solely for
cash, interest bearing note payable and noniterest bearing
notes payable issued for property.
Notes Payable
▪Promissory notes is an unconditional promise in writing made
by one person to another, signed by the maker, engaging to
pay on demand or at a fixed or determinable future time a
sum certain in money to order or to bearer.
Notes Payable
▪Initial Measurement
- Not designated at FVPL shall be measured initially at FV minus
transactions costs that are directly attributable to the issue of
the notes payable.
- If the NP is irrevocably designated at FVPL, transaction costs
are expensed immediately.

*The FV of the notes payable is equal to the PV of the future

cash payment to settle the NP using market rate of interest.
Notes Payable
▪Subsequent Measurement
- At amortized cost using EIM.
- FVPL (if the NP is irrevocably designated at FVPL).
Notes Payable
▪When a NP is issued solely for cash, the PV is equal to the cash
proceeds.

▪When a property or noncash asset is acquired by issuing a promissory

note which is interest bearing, the property or asset is recorded at the
purchase price.

▪When a noninterest bearing note is issued for a property, the property

is recorded at the cash price of the property. Cash price is assumed to
be the PV of the note issued and the difference cash price and the
face amount of the note represents the imputed interest.
FV Option of measuring NP
▪Gain/ Loss shall be accounted for as follows:
- Change in FV attributable to credit risk is recognized in OCI.
- The remaining amount is recognized in P/L.

*Cumulative gain or loss recognized recognized may be

transferred to equity or retained earnings.
Debt Restructure
Ms. Charmaine Soriano Buan, CPA
Technical Knowledge
▪To understand the nature and purpose of debt restructuring.
▪To identify the types of debt restructuring.
▪To know the accounting for an asset swap, equity swap and
modification of terms of the old liability.
Debt Restructuring
▪It is a situation where the creditor, for economic or legal
purposes related to the debtor’s financial difficulties, grants to
the debtor concession that would not otherwise be granted in
a normal business relationship.

▪Types of Debt Restructuring:

1. Asset Swap
2. Equity Swap
3. Modification of Terms
Asset Swap
▪ Debtor transfers to the creditor any asset such as real estate, inventory,
receivables and investment, in full payment of an obligation.

▪ Asset Swap is treated as derecognition of a financial liability or

extinguishment of an obligation. The difference between the carrying
amount of the financial liability and the consideration given shall be
recognized in P/L.

▪ Dacion en Pago – arises when a mortgaged property is offered by the debtor

in full settlement of the debt.

*USA GAAP
Equity Swap
▪Issuance of share capital by the debtor to the creditor in full or
partial payment of an obligation.
- An entity shall measure the equity instruments to extinguish a
financial liability in order of priority:
1. FV of the equity instruments issued.
2. FV of the liability extinguished.
3. CA of the liability extinguished.
Modification of Terms
▪Modification may involve either the interest (reduction of
interest rate/ forgiveness of unpaid interest/ moratorium of
interest), maturity date (extension of the maturity date or
reduction of the principal amount), or both.
▪Substantial Modification (gain or loss is at least 10% of the old
liability) – treated as extinguishment of the old financial
liability and the recognition of a new liability.

*Any gain or loss on modification whether substantial or not is

recognized in P/L.