LEARNINGS IN IMPAIRMENT OF LOANS

• Impairment – included under expenses when the book value of an asset exceeds the
recoverable amount. Impairment of asset is diminishing in quality, strength, amount or
value of an asset. It is simply: Carrying Amount > Recoverable Amount.
• Formula: Carrying Amount – Recoverable Amount
Where: Carrying Amount = amortized cost of receivable + accrued interest
Recoverable Amount = PV of future cash flow using original EIR
• Impairment can be done through direct and allowance method.

THREE STAGES IMPAIRMENT APPROACH

STAGE 1 STAGE 2 STAGE 3

Recognition of Expected 12 Months Expected Lifetime Expected Lifetime Expected Credit

Credit Losses Credit Losses Credit Losses Losses

Interest Revenue Effective Interest on Effective Interest on Effective Interest Net

Gross Carrying Amount Gross Carrying Amount Carrying Amount

Receivables Performing Under Performing Non-Performing

HOW TO COMPUTE EIR?

1. Trial and Error

2. Interpolation Approach
3. Other Methods

LEARNINGS IN RECEIVABLE FINANCING

• Pledge – process of transferring receivables

Net Proceeds = FV of the Loan – Discount

• Assignment – assign by entity

Net Proceeds = FV of the Loan- Other Charges
Equity on Assign Accounts = Accounts Receivable – Loan Payable

• Factoring – sales
1) With Recourse Basis – without guaranty
2) Without Recourse Basis – with guaranty
Net Proceeds = FV of the Loan – Other Charges – Factors Holdback
Gain or Loss = Selling Price + Factors Holdback – Carrying Amount of AR

• Discounting: Net Proceeds = Maturity Value – Discount

Where: Maturity Value = Principal + Total Interest
Discount = Maturity Value x Discount Rate x Discount Period
Gain or Loss = Selling Price – Carrying Amount of Notes Receivable