NOTES RECEIVABLE AND

LOAN IMPAIRMENT
FAR by Raymund Francis A. Escala
ACCOUNTING FOR NOTES AND
LOANS RECEIVABLES
NOTES AND LOANS RECEIVABLE
Notes Receivable
• Notes receivable are claims supported by formal
promises to pay usually in the form of the notes.
Loans 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.
ACCOUNTING FOR NOTES RECEIVABLE
Conceptually, notes receivable shall be measured
at its present value or the discounted value of its
cash flows.
The accounting for notes receivable is dependent
on the related terms of the notes, whether short-
term or long-term.
Valuation of Notes Receivables
❖ Short-term notes
• Initial and subsequent – generally recognized at face
amount
• Although there is still a difference between the face
value and the present value, the discount is deemed to
be immaterial and therefore computing for the present
value shall not be necessary.
Valuation of Notes Receivables
❖Long-term notes
• Initial – recognized at fair value plus
transaction costs
• Subsequent – measured at amortized cost
using effective interest method
Valuation of Notes Receivables
Interest-bearing
▪ If the note is interest bearing and the interest rate is a realistic interest
rate, the face value of the note shall be its present value.
▪ If a note is interest bearing but the interest rate is unreasonably low, it will
be necessary to compute for the present value of the cash flows which will
include the future interest computed on the low interest rate.
Non-interest bearing
▪ For noninterest bearing, it will be necessary to discount the cash flows in
order to present the notes at their present value.
Presentation of Notes Receivables
Presentation of the present value
The present value shall be the amount to be
presented, which is determined as follows:
Face amount xxx
Less: Unamortized Discount ( xxx )
Present value or carrying amount xxx
ACCOUNTING FOR LOANS RECEIVABLE
The accounting for loans receivable is almost similar with the
accounting for the notes receivable.
✓ Both receivables are valued at fair value plus transaction
costs.
✓ The fair value of the loan may be determined in the same
manner with the determination of the fair value of the
loan.
✓ The main difference lies on the transaction costs. Loans
normally involve transactions costs while notes do not.
Valuation of Loans Receivable
Initial
• Initially measured at fair value plus transaction cost which is
determined as follows:
Principal amount (representing the initial FV) xxx
Add: Direct origination fees xxx
Less: Loan origination fees (xxx)
Initial present value or carrying amount xxx
Subsequent
• Measured at amortized cost using effective interest method.
NOTES AND LOANS IMPAIRMENT
NOTES AND LOAN IMPAIRMENT
➢PFRS 9 provides that an entity shall recognize a loss
allowance for expected credit losses on financial asset
measured at amortized cost.
➢Standards require the assessment of the collectability of a
receivable and whenever circumstances and present
information and events indicate that it will be probable
that any portion of the principal and interest agreed upon
will not be collected an allowance for the present value of
cash flows that will not be collected shall be recognized.
NOTES AND LOAN IMPAIRMENT
Determination of the amount of impairment loss
Present value of expected cash flows xxx
Less: Carrying amount of LR xxx
Accrued interest xxx ( xxx )
Loan impairment loss xxx

Pro-forma journal entry

Impairment loss xxx
Interest receivable (if any) xxx
Allowance for impairment loss xxx
NOTES AND LOAN IMPAIRMENT
FS Presentation
Face amount xxx
Less: Allowance for impairment loss ( xxx )
Carrying amount xxx
Thank You !!!