Chapter 13 LOAN RECEIVABLE Initial amount lower than principal
amount the amortization of the
Loan Receivable difference is added to the carrying Financial asset arising from loan amount granted by a bank or other financial institution to a borrower or client Initial amount higher than principal Loan may be short-term but in most amount the amortization of the cases, the repayment periods cover difference is deducted from the carrying several years amount
Initial Measurement of loan receivable
Origination fees Loan Receivable(FV)+Transaction cost FV-Transaction price(amount of loan fees charged by the bank against the granted) borrower for the creation of the loan Direct origination cost- include compensation for the ff. included in the initial activities measurement of the LCR 1. Evaluating the borrowers financial Indirect Origination cost- condition treated as outright expense 2. Evaluating guarantees, collateral TC directly attributable to the and other security acquisition of the financial asset 3. Negotiating the terms of the loan 4. Preparing and processing the Subsequent Measurement of Loan Receivable documents related to the loan PFRS 9, paragraph 4.1.2 provides that if the 5. Closing and approving the loan business model in managing financial asset is to transaction collect contractual cash flows o specified dates and the contractual cash flows are solely payments of principal and interest, the financial Accounting for origination fees asset shall be measured at amortized cost. Direct origination fees capitalized, added to the LR is measured at AMORTIZED COST loan balance using the Effective interest method Indirect origination cost valid expense of Amortized Cost creditor
amount at which the loan receivable is
measured initially Origination fee Origination fee a. Minus principal payments Received from borrower paid by bank b. Plus or minus cumulative amortization of any difference Unearned Interest Income between the initial carrying amount (subject to amortization) and the principal maturity amount. c. Minus reduction for impairment or Entry: Unearned Interest Income uncollectible Interest Income Origination fee Origination fee Received from borrower Paid by bank
Direct origination cost CREDIT RISK
(subject to amortization) Risk that one party to a financial (Prepaid asset) instrument will cause a financial loss for Entry: Interest Income the other party by failing to discharge an DOC obligation. Risk contemplated risk that the issuer Impairment of Loan will fail to perform a particular obligation, risk does not necessarily PFRS 9, paragraph 5.5.1 provides that an entity relate to the credit worthiness of the shall recognize a loss allowances for expected isuuer credit losses on financial asset measured at amortized cost PFRS 5.5.3 provides that an entity shall measure Carrying amount xx the loss allowance for a financial instrument at Present Value (discounted @original ER) xx an amount equal to the lifetime expected credit Impairment Loss xx losses significantly since initial recognition Loan Impairment loss xx Credit losses present value of all cash shortfalls Accrued Interest Receivable xx Allowance for loan Impairment xx Expected credit losses- estimate of credit losses over the life of the financial instrument Loan Receivable xx Allowance for loan impairment xx Measurement of Impairment Carrying Amount xx
When measuring expected credit losses, an To record the cash collection
entity should consider: Cash xx Loan Receivable xx 1. The probability-weighted outcome 2. The time value of money To record the interest income using the 3. Reasonable and supportable effective interest method: information that is available without Allowance for loan impairment xx undue cost or effort. Interest Income (CA x int. Rate) xx
Carrying amount xx Present Value (discounted @original ER) xx Impairment Loss xx
CA of the LR shall be reduced either
directly or through the use of an allowance account.