Loan Receivable Definition: Financial asset arising from a loan granted by a bank or other financial institution to a borrower or client.

May be short term but in most cases, repayment periods cover several years.

Term:

Initial Measurement of Loan Receivable Initial Recognition: FV + transaction costs (directly attributable to the acquisition of financial asset) Fair Value = Transaction Price = Amount of the loan granted Transaction Costs = Direct Origination Costs Direct Origination Costs should be included in the initial measurement of the loan receivable. Subsequent Measurement of Loan Receivable PFRS 9 provides that if the business model in managing financial asset is to collect contractual cash flows on specified dates and the contractual cash flows are solely payments of principal and interest, the financial asset shall be measured at amortized cost. Loan receivable is measured at amortized cost using effective interest method. Amortized cost is the amount at which the LR is measured initially minus principal repayment, plus or minus the cumulative amortization of any difference between the initial amount recognised and the principal maturity amount, minus reduction for impairment or uncollectibility. Amortized Costs = initial amount principal repayment +/- cumulative amortization reduction for impairment or uncollectibility Cumulative Amortization = Initial Amount recognised Principal Maturity Amount Initial Amount<Principal Amount (amortization is added to carrying amount) Initial Amount > Principal Amount (amortization is deducted from carrying amount) Origination Fees fees charged by the bank against the borrower for the creation of loan. 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. Recognized as unearned interest income and amortized over the term of the loan.

Direct Origination Costs if origination fees are not chargeable against the borrower Are deferred and also amortized the term of the loan. Preferably costs are offset directly against any unearned origination fees received

OF received exceed DOC OF received - DOC = unearned interest income DOC exceed OF received DOC-OF received = unearned interest income (amortization will decrease interest income) (amortization will increase interest income)

OF received and DOC are included in the measurement of the loan receivable. ILLUSTRATION: Global Bank granted a loan to a borrower on January 1, 2010. The interest on the loan is 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: Principal Amount OF received from borrower Direct Origination Costs Incurred Initial Carrying Amount: Entries: 1. Loan Receivable Cash 2. Cash Unearned Interest Income 3. Unearned Interest Income Cash 100,000.00 100,000.00 5,000,000.00 5,000,000.00 331,800.00 331,800.00 5,000,000.00 331,800.00 100,000.00

5,000,000.00 331,800.00 + 100,000.00 = 4,768,200.00

Unearned Interest Income Balance = 231,800.00 (to be amortized over the term of the loan using effective interest method) 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. Initial Carrying Amount < Principal Amount (Amortization is added to carrying amount) = Nominal Rate<Effective Rate

ER is the rate that would equate the PV of the future cash flows of the loan to the initial carrying amount of Loan Receivable. Effective Rate of 14% PV of Principal ( 5M x 0.675) PV of Interest ( 5M x 12% = 600T x 2.322) 3,375,000.00 1,393,200.00 4,768,200.00 Amortization of Unearned Interest Income using effective interest method Date 01/01/10 12/31/10 12/31/11 12/31/12 Formulas: Interest received Interest income Entries: Cash Interest Income 600,000 600,000 = = Principal x Nominal rate x Effective Rate 600,000.00 600,000.00 600,000.00 667,548.00 677,005.00 687,247.00 67,548.00 77,005.00 87,247.00 Interest Received Interest Income Amortization Carrying Amount 4,768,200.00 4,835,748.00 4,912,753.00 5,000,000.00

Carrying Amount

Unearned Interest Income Interest Income Presentation: Loan Receivable

67,548 67,548

5,000,000 ( 164,252) 4,835,748

Unearned Interest Income ( 231,800 - 67,548) Carrying Amount- 12/31/10

The above presentation is in accordance with the standard requirement that a loan receivable is measured at amortized cost. The Carrying amount is actually the amortized cost. 12/31/11 entries Cash Interest Income Unearned Interest Income Interest Income 12/31/12 entries Cash Interest Income Unearned Interest Income Interest Income Cash Loan Receivable 87,247 87,247 5,000,000 5,000,000 600,000 600,000 77,005 77,005 600,000 600,000

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. 3. Debt restructuring The lender, for economic or legal reasons relating to the borrower s financial difficulty, grants to the borrower a concession that the lender would not otherwise consider. 4. Probability that the borrower will enter bankruptcy or other financial reorganization. 5. The disappearance of an active market for the financial asset because of financial difficulty. 6. Observable data indicating that there is a measurable decrease in the estimated 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 financial assets in the group.

Measurement of Impairment PAS 39, par 63, provides that if there is evidence that an impairment loss on loan receivable 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 future cash flows discounted at the original effective rate of the loan. The carrying amount of the LR shall be reduced either directly or through the use of allowance account. The amount of the loss shall be recognized in profit or loss.