Loan Receivable Initial Amount < Principal Amount (amortization is added to carrying amount)

Definition: Financial asset arising from a loan granted by a bank or other financial Initial Amount > Principal Amount (amortization is deducted from carrying amount)
institution to a borrower or client.
Origination Fees – fees charged by the bank against the borrower for the creation of loan.
Term: May be short term but in most cases, repayment periods cover several
years. - Include compensation for activities such as evaluating the borrower’s
financial condition, evaluating guarantees, collateral and other security,
Initial Measurement of Loan Receivable negotiating the terms of the loan, preparing and processing documents
and closing the loan transaction.
Initial Recognition: FV + transaction costs (directly attributable to the acquisition of financial
- Recognized as unearned interest income and amortized over the term
asset) of the loan.
Fair Value = Transaction Price = Amount of the loan granted

Transaction Costs = Direct Origination Costs Direct Origination Costs – if origination fees are not chargeable against the borrower
Direct Origination Costs should be included in the initial measurement of the loan
- Are deferred and also amortized the term of the loan.
receivable. - Preferably costs are offset directly against any unearned origination fees
Subsequent Measurement of Loan Receivable received

PFRS 9 provides that if the business model in managing financial asset is to collect OF received exceed DOC
contractual cash flows on specified dates and the contractual cash flows are solely OF received - DOC = unearned interest income (amortization will increase interest
payments of principal and interest, the financial asset shall be measured at amortized cost. income)
Loan receivable is measured at amortized cost using effective interest method. DOC exceed OF received
Amortized cost is the amount at which the LR is measured initially minus principal
DOC - OF received = unearned interest income (amortization will decrease interest
repayment, plus or minus the cumulative amortization of any difference between the initial income)
amount recognised and the principal maturity amount, minus reduction for impairment or
uncollectibility. OF received and DOC are included in the measurement of the loan receivable.

Amortized Costs = initial amount – principal repayment +/- cumulative amortization – ILLUSTRATION:
reduction for
Global Bank granted a loan to a borrower on January 1, 2010. The interest on the loan is
impairment or uncollectibility 12% payable annually starting December 31, 2010. The loan matures in three years on
December 31, 2012. The other data related to the loan are:
Cumulative Amortization = Initial Amount recognised – Principal Maturity Amount
Principal Amount 5,000,000.00
OF received from borrower 331,800.00 Amortization of Unearned Interest Income using effective interest method
Direct Origination Costs Incurred 100,000.00 Date Interest Received Interest Income Amortization Carrying
Initial Carrying Amount: 5,000,000.00 – 331,800.00 + 100,000.00 = 4,768,200.00 Amount

Entries: 01/01/10 4,768,200.00

1. Loan Receivable 5,000,000.00 12/31/10 600,000.00 667,548.00 67,548.00 4,835,748.00
Cash 5,000,000.00
12/31/11 600,000.00 677,005.00 77,005.00 4,912,753.00
2. Cash 331,800.00
Unearned Interest Income 331,800.00
12/31/12 600,000.00 687,247.00 87,247.00 5,000,000.00
3. Unearned Interest Income 100,000.00
Formulas:
Cash 100,000.00
Interest received = Principal x Nominal rate
Unearned Interest Income Balance = 231,800.00 (to be amortized over the term of the loan
using Interest income = Carrying Amount x Effective Rate
effective interest method)
Entries:
New effective rate must be computed because of OF received and DOC. Either “trial and
error” method or “interpolation” approach is used in computing effective rate. Cash 600,000

Initial Carrying Amount < Principal Amount = Nominal Rate < Effective Rate Interest Income 600,000
(Amortization is added to carrying amount)

ER is the rate that would equate the PV of the future cash flows of the loan to the initial Unearned Interest Income 67,548
carrying amount of Loan Receivable.
Interest Income 67,548
Effective Rate of 14%
Presentation:
PV of Principal ( 5M x 0.675) 3,375,000.00
Loan Receivable 5,000,000
PV of Interest ( 5M x 12% = 600T x 2.322) 1,393,200.00
Unearned Interest Income ( 231,800 - 67,548) ( 164,252)
4,768,200.00
Carrying Amount- 12/31/10 4,835,748
The above presentation is in accordance with the standard requirement that a loan 3. Debt restructuring – The lender, for economic or legal reasons relating to the
receivable is measured at amortized cost. The Carrying amount is actually the amortized borrower’s financial difficulty, grants to the borrower a concession that the lender
cost. would not otherwise consider.
4. Probability that the borrower will enter bankruptcy or other financial
12/31/11 entries reorganization.
Cash 600,000 5. The disappearance of an active market for the financial asset because of financial
difficulty.
Interest Income 600,000 6. Observable data indicating that there is a measurable decrease in the estimated
Unearned Interest Income 77,005 future cash flows from a group of financial assets since the initial recognition of
those assets, although the decrease cannot yet be identified with the individual
Interest Income 77,005 financial assets in the group.
12/31/12 entries Measurement of Impairment
Cash 600,000 PAS 39, par 63, provides that if there is evidence that an impairment loss on loan receivable
Interest Income 600,000 carried at amortized cost has been incurred, the amount of the loss is measured as the
“difference between the carrying amount of the loan and the present value of estimated
Unearned Interest Income 87,247 future cash flows discounted at the original effective rate of the loan.
Interest Income 87,247
The carrying amount of the LR shall be reduced either directly or through the use of
Cash 5,000,000 allowance account. The amount of the loss shall be recognized in profit or loss.

Loan Receivable 5,000,000

Impairment of Loan

PAS 39, par 58, provides that an entity shall assess at every end of reporting period whether
there is objective evidence that a financial asset or group of financial assets is impaired. If
such exists, the entity shall determine and recognize the amount of any impairment loss.

Objective evidence of impairment may result from the following “loss events” occurring
after the intitial recognition of the financial asset:

1. Significant financial difficulty of the issuer or obligor.

2. Breach of contract, such as default or delinquency in interest or principal payment.