FAR Qualifying Exam Review
Loan Receivable
By Sarah M. Balisacan, CPA
LOAN RECEIVABLE
SUBSEQUENT
MEASUREMENT
INITIAL MEASUREMENT
Loan receivable is measured at
Loan receivables are measured amortized cost using effective
DEFINITION at fair value plus transaction interest method.
A loan receivable is a costs.
If initial amount is lower than
financial asset arising from a Fair value of the loan receivable the principal amount, the
loan granted by a bank or is normally the transaction amortization of the difference is
other financial institution to a price. added to the carrying amount.
borrower or client. Transaction costs include If initial amount is higher than
direct origination costs. the principal amount, the
Indirect origination costs are amortization of the difference is
expensed outright. deducted from the carrying
amount.
INITIAL MEASUREMENT
Principal Amount xxx
Less: Origination Fees Received from Borrower (xxx)
Add: Direct Origination Costs xxx
Initial Carrying Amount xxx
ORIGINATION FEES RECEIVED Difference is Unearned Interest DIRECT ORIGINATION COSTS
Income and amortization
FROM BORROWER
increases interest income;
▰ Origination costs not chargeable to
▰ Fees charged against the borrower Effective int. % > Nominal int. %
the borrower
by the bank for the creation of the ▰ Preferably offset against unearned
loan Difference is charged to Direct origination fees received
▰ Recognized as Unearned Interest
Origination Costs and
amortization decreases interest
Indirect origination costs are EXPENSED
Income and amortized over the term OUTRIGHT
income;
of the loan
Effective int. % < Nominal int. %
INITIAL MEASUREMENT
Journal Entries on January 1, 2020
To record the loan
Loan Receivable 5,000,000
Cash 5,000,000
Global Bank granted a loan to a borrower on To record the origination fees received from the borrower
January 1, 2020. The interest on the loan is 12% Cash 331,800
payable annually starting December 31, 2020. Unearned Interest income 331,800
The loan matures in three years on December To record the direct origination costs incurred by the bank
31, 2022. The other data related to the loan are: Unearned interest income 100,000
Cash 100,000
Principal amount 5,000,000
Original fees received from borrower 331,800
Direct origination costs incurred 100,000 Principal Amount 5,000,000
Less: Origination Fees Received from Borrower (331,800)
Add: Direct Origination Costs 100,000
4 Initial Carrying Amount 4,768,200
INTERPOLATION
Choose any two interest rates greater than 12%.
13% 15%
PV of Principal 3,465,250.81 3,287,581.16
(LS; nper =3; FV= 5M)
PV of Interest (OA; nper=3; 1,416,691.56 1,369,935.07
PMT = 5,000,000*12% = 600,000)
Total PV 4,881,942.37 4,657,516.23
Initial carrying amount 4,768,200 4,768,200
Initial CA > Principal Amt. Effective < Nominal Difference (Absolute Value) 113,742.37 110,683.77
Initial CA < Principal Amt. Effective > Nominal /D1/ x (R2 - R1)
R1 +
(/D1/ + /D2/)
Since initial carrying amount < principal amount, 113,742.37 x (0.15 - 0.13)
effective interest rate > nominal rate of 12%. 0.13 +
(113,742.37 – 110,683.77)
5
= 14.01% or 14%
SUBSEQUENT MEASUREMENT
(Effective Interest Method)
Journal Entries on December 31, 2020
Cash 600,000
Interest income 600,000
Unearned interest income 67,548
Interest Received = Principal x Nominal Rate Interest income 67,548
Interest Income = Carrying amount x Effective Rate Journal Entries on December 31, 2021
= Interest Received +/- Amortization Cash 600,000
Interest income 600,000
Date Interest Interest Amortization Carrying Unearned interest income 77,005
received income amount Interest income 77,005
Jan. 1, 2020 4,768,200 Journal Entries on December 31, 2022
67,548 Cash 600,000
Dec. 31, 2020 600,000 - 667,548 = 67,548 4,835,748
Interest income 600,000
77,005
Dec. 31, 2021 600,000 - 677,005 = 77,005 4,912,753 Unearned interest income 87,247
87,247 Interest income 87,247
Dec. 31, 2022 600,000 - 687,247 = 87,247 5,000,000
Cash 5,000,000
Balancing figure Loan receivable 5,000,000
6
IMPAIRMENT
To record the impairment
Impairment loss xxx
Accrued interest receivable xxx
Allowance for loan impairment xxx
To record interest income
Allowance for loan impairment xxx
Interest income xxx
PAS 39 Objective evidence of impairment Principal Amount xxx
• Significant financial difficulty Add: Accrued interest receivable xxx
• Breach of contract
Carrying Amount before impairment xxx
• Debt restructuring
• Probability that borrower will enter bankruptcy or Less: PV of Cash flows using original effective interest rate (xxx)
any financial reorganization Impairment Loss xxx
• Disappearance of an active market for the financial
asset Loan Receivable xxx
• Observable data indicating a measurable decrease
Allowance for loan impairment (xxx)
in estimated future cash flows from a group of
7 Carrying Amount after Impairment (equal to PV of cash flows) xxx
assets
EXPECTED CREDIT LOSSES
(PFRS 9)
Change in credit quality since initial recognition
Recognition of expected credit losses
12-month expected Life-time expected Lifetime expected credit
credit losses credit losses losses
Forward-looking expected credit loss Interest revenue
(ECL) model Effective interest on
Considers historic, current and Effective interest on Effective interest on amortized cost carrying
forward-looking information (including gross carrying amount gross carrying amount amount (that is, net of
credit allowance
macro-economic data)
Earlier recognition of credit losses Stage 1 Stage 2 Stage 3
Performing Underperforming Non-performing
(Initial recognition) (Assets with significant (Credit-impaired assets)
increase in credit risk since
initial recognition)
Incurred loss model Low credit risk threshold More than 90 days past Equivalent to occurrence
Credit losses recognized only once a equivalent to investment due (rebuttable of loss event under PAS
8
loss event has occurred grade assumption) 39
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