CHAPTER 7

LOAN RECEIVABLE

• financial asset arising from a loan granted by a bank or other financial institution to a borrower or client.

MEASUREMENT

INITIAL RECOGNITION

• fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.
➢ Transaction costs that are directly attributable to the loan receivable include direct origination
cost.

✓ Indirect origination cost should be treated as outright expense.

SUBSEQUENT MEASUREMENT

• amortized cost using the effective interest method.

✓ The amortized cost is the amount which the loan receivable is measured initially:

A. Minus principal payment

B. Plus, or minus cumulative amortization of any difference between the initial carrying amount and the
principal maturity amount

C. Minus reduction for impairment

❖ In the other words, 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.

ACCOUNTING FOR ORIGINATION FEES

ORIGINATION FEES

• fees charged by the bank against the borrower for the creation of the loan.
➢ The origination fees received from borrower are recognized as unearned interest income and amortized
over the term of the loan.

Origination fees include compensation for the following activities:

A. Evaluating the borrower’s financial condition

B. Evaluating guarantees, collateral, and other security

C. Negotiating the terms of the loan

D. Preparing and processing the documents related to the loan

E. Closing and approving the loan transaction

DIRECT ORIGINATION FEES

• origination fees not chargeable against the borrower

• deferred and amortized over the term of the loan.
➢ Accordingly, the origination fees received, and the direct origination costs are included in the
measurement of the loan receivable.
 IMPAIRMENT OF LOAN

PFRS paragraph 5.5.1, provides that an entity shall recognize a loss allowance for expected credit losses
on financial asset measured at amortized cost.

IMPAIRMENT LOSS

= Carrying Amount – Present Value

➢ The carrying amount of the loan receivable shall be reduced either directly or using an allowance
account.

CREDIT RISK

• risk that one party to a financial instrument will cause a financial loss for the other party by failing to
discharge an obligation.

MEASUREMENT OF IMPAIRMENT

When measuring expected credit losses, an entity should consider:

A. The probability-weighted outcome

B. The estimate should reflect the possibility that a credit loss occurs and the possibility that no credit loss
occurs.

C. The time value of money

D. The expected credit losses should be discounted.

E. Reasonable and supportable information that is available without undue cost or effort.
 CHAPTER 8
RECEIVABLE FINANCING
(PLEDGE, ASSIGNMENT, & FACTORING)

RECEIVABLE FINANCING

• techniques of accelerating cash inflow through the use of receivables.

PLEDGE OF ACCOUNTS RECEIVABLE

• Refers to the use of receivables as collateral for a loan.

• Borrowing company continues to collect the receivables.
• No complex accounting entries.
• Record the loan and disclose the pledge.
• If the loan is not paid, the creditor has the right to collect the pledged receivables.

ASSIGNMENT OF ACCOUNTS RECEIVABLE

• more formal borrowing in which the receivables are used as security of collateral for a loan.
• Borrower transfers its rights in some of its accounts receivable to a lender in consideration for a loan.
• Assignor retains ownership of the accounts assigned.
• Borrower = assignor
• Creditor = assignee.
• Assignor signs a financing agreement and a promissory note.

TWO TYPES:

1. GENERAL ASSIGNMENT

✓ All accounts receivable serve as collateral security for a loan.

✓ Same as pledge

2. ASSIGNMENT OF SPECIFIC RECEIVABLES

✓ Specific accounts receivable serve as collateral for a loan.

✓ Features of assignment

✓ May be either non-notification or notification basis

NON-NOTIFICATION BASIS

• Customers are not notified of the assignment.

• Customers continue to pay to the assignor.

NOTIFICATION BASIS

• Customers are notified of the assignment.

• Customers pay to the assignee.
• Assignee lends only a certain percentage of the face value of the receivables. The percentage depends on
the quality of the receivables.
• Assignee charges interest for the loan and service or financing charge for the assignment arrangement.
• The assigned accounts are segregated from other accounts.
• The equity of the assignor in the assigned accounts should be disclosed parenthetically or through a
note.
FACTORING OF ACCOUNTS RECEIVABLE

• sale of accounts receivable on a without recourse, notification basis.

• Ownership of accounts receivable is transferred to the buyer of the receivables.
• Seller of the receivables = Transferor
• Buyer = Transferee or Factor.
• Recourse is the right of the transferee to receive payment from the transferor should the debtor fail to
pay.
• Factor assumes collection function and risk of collection.
• Customers are notified and required to pay direct to the factor.

TWO TYPES

1. CASUAL FACTORING
• A company is forced to factor its accounts receivable at a substantial discount to obtain cash.
• One-time deal.

2.ON A CONTINUING AGREEMENT

• a financing company purchases all of the accounts receivable of a company.
• Factor charges commission or factoring fee.
• Factor’s holdback – factor may withhold a predetermined amount as a protection against customer
returns and allowances. (actually, a receivable from factor and classified as current asset.)
• Typically, the factor charges a commission or factoring fee of 5% to 20% for its services (credit
approval, billing, collecting, and assuming uncollectible factored accounts).
➢ Final settlement of the factor’s holdback is made after the factored receivables have been fully
collected.
 CHAPTER 9
RECEIVABLE FINANCING
(DISCOUNTING OF NOTES RECEIVABLE)
• transfer of negotiable notes to a bank or finance company willing to exchange such instruments for cash.
• endorsement may be with or without recourse.

TERMS RELATED TO THE DISCOUNTING OF NOTES

NET PROCEEDS

• refer to the discounted value of the note received by the endorser from the endorsee.

MATURITY VALUE

• amount of the due on the note at the date of maturity.

MATURITY DATE

• date which the note should be paid.

PRINCIPAL (FACE VALUE)

• amount appearing on the face of the note.

INTEREST

• amount of interest for the full term of the note.

INTEREST RATE

• rate appearing on the face of the note.

TIME

• period within which interest shall accrue.

DISCOUNT

• amount interest deducted by the bank in advance.

DISCOUNT RATE

• rate used by the bank in computing the discount. It is different from interest rate.
➢ If no discount rate is given, the interest rate is safely assumed at the discount rate.

DISCOUNT PERIOD (unexpired term of the note)

• period of the time from date of discounting to maturity date.

FORMULAS:

Interest = Principal x Rate x Time

Maturity Value = Principal + Interest

Discount Period = Term of the Note - Expired portion up to the date of discounting

Discount = Maturity Value x Discount Rate x Discount Period

Net Proceeds = Maturity Value – Discount