Loan Receivable

By: Dr. Angeles A. De Guzman

Dean, College of Business Education
 Definition
• A financial asset arising from a loan granted by
a bank or other financial institution to a
borrower or client
• The term loan may be short-term but in most
cases, the repayment periods cover several
years.
 Initial Measurement
• At fair value plus transaction costs that are
directly attributable to the acquisition of the
financial asset.
• The fair value of the loan receivable at initial
recognition is normally the transaction price,
meaning, the amount of the loan granted
• Transaction costs include direct origination costs
• Indirect origination costs should be treated as
outright expense.
 Subsequent Measurement
• A loan receivable is measured at amortized
cost using the effective interest method.
• The amortized cost is the amount at which the
loan receivable is measured initially minus
principal repayment, plus or minus the
cumulative amortization of any difference
between the initial amount recognized and the
principal maturity amount, minus reduction for
impairment or uncollectibility
 Origination Fees
• Include compensation for 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.
• The origination fees received from borrower are
recognized as unearned interest income and amortized
over the term of the loan
• Direct origination costs (if not chargeable against the
borrower) are deferred and also amortized over the term
of the loan
 Impairment of Loan
• The following loss events may indicate objective
evidence of impairment:
– Significant financial difficulty of the issuer or obligor
– Brach of contract, such as default or deliquency in interest or
principal payment.
– Debt restructuring
– Probability
– The disappearance of an active market for the financial asset
because of financial difficulty
– Observable data indicating that there is measurable decrease
in the estimated future cash flows
 Measurement of Impairment
• The amount of the loss is measured as the
“difference between the carrying amount of
the loan and the present value of estimated
future cash flows discounted at the original
effective rate of the loan.”
• The carrying amount of the loan receivable
shall be reduced either directly or through the
use of an allowance account.