Loan Receivable

Financial Accounting and Reporting

Loan Receivable

• a financial asset arising from a loan granted by a bank or

other financial institution to a borrower or client.
• Initial measurement
– fair value plus (direct) transaction costs
• fair value is usually the transaction price (which is the amount of the
loan granted)
• (direct) transaction costs include direct origination costs
• indirect origination costs should be treated as outright expense
Loan Receivable

• Subsequent measurement
– at amortized cost using the effective interest method
• Amortized cost is
– initial carrying amount
– minus principal repayment
– plus or minus cumulative amortization (of any difference
between the initial carrying amount AND the principal maturity
amount)
– minus reduction for impairment or uncollectibility.
Origination Fees

• The fees charged by the bank against the borrower for

the creation of the loan are known as “origination fees”.
• Accounting for origination fees received
– recognized as unearned interest income and amortized over
the term of the loan.
Origination Costs

• Origination costs not chargeable against the borrower are

known as “direct origination costs”.
• Direct origination costs
– are deferred and amortized over the term of the loan.
– may be offset directly against any unearned origination fees
received.
– if the direct origination costs exceed the origination fees
received, the difference is charged to “direct origination costs”
(which is also included in the measurement of the loan
receivable).
An Example

Global Bank granted a loan to a borrower on January 1, 2017. The

interest on the loan is 12% payable annually starting December 31,
2017. The loan matures in three years on December 31, 2019.

Initial measurement
Principal amount 5,000,000
Origination fees received ( 331,800)
Direct origination costs incurred 100,000
4,768,200
An Example

Global Bank granted a loan to a borrower on January 1, 2017. The

interest on the loan is 12% payable annually starting December 31,
2017. The loan matures in three years on December 31, 2019.

Journal entry to record loan

Loan receivable 5,000,000
Cash 4,768,200
Unearned interest income 231,800
An Example

Global Bank granted a loan to a borrower on January 1, 2017. The

interest on the loan is 12% payable annually starting December 31,
2017. The loan matures in three years on December 31, 2019.

Amortization table
Date Interest received Interest income Amortization Carrying amount
1/1/17 4,768,200
12/31/17 600,000 667,548 67,548 4,835,748
12/31/18 600,000 677,005 77,005 4,912,753
12/31/19 600,000 687,247 87,247 5,000,000
An Example

Global Bank granted a loan to a borrower on January 1, 2017. The

interest on the loan is 12% payable annually starting December 31,
2017. The loan matures in three years on December 31, 2019.

Present value using 13%

PV of principal (5,000,000 × 0.693) 3,465,000
PV of interest (600,000 × 2.361) 1,416,600
4,881,600*

* not equal to initial carrying amount of P4,768,200.

An Example

Global Bank granted a loan to a borrower on January 1, 2017. The

interest on the loan is 12% payable annually starting December 31,
2017. The loan matures in three years on December 31, 2019.

Present value using 14%

PV of principal (5,000,000 × 0.675) 3,375,000
PV of interest (600,000 × 2.322) 1,393,200
4,768,200*

* equal to initial carrying amount of P4,768,200.

Impairment of Loan

• An entity shall recognize a loss allowance for expected

credit losses on financial asset measured at amortized
cost.
• The amount of impairment loss can be measured as the
difference between the carrying amount and the present
value of estimated future cash flows discounted at the
original effective rate.
• The carrying amount of the loan receivable shall be
reduced either directly OR through the use of an
allowance account.
Example 1
International Bank loaned P5,000,000 to Bankard Company on January 1, 2015. The terms of
the loan require principal payment of P1,000,000 each year for 5 years plus interest at 10%.
The first principal and interest payment is due on December 31, 2015. Bankard Company made
the required payments on December 31, 2015 and December 31, 2016.

During 2017, Bankard Company began to experience financial difficulties and was unable to
make the required principal and interest payment on December 31, 2017. On December 31,
2017, International Bank assessed the collectibility of the loan and has determined that the
remaining principal payments will be collected but the collection of the interest is unlikely. The
loan receivable has carrying amount of P3,300,000 including the accrued interest of P300,000
on December 31, 2017.

Date of cash flow Amount projected

December 31, 2018 500,000
December 31, 2019 1,000,000
December 31, 2020 1,500,000
Example 1
Present value of cash flows (new)
December 31, 2018 ( 500,000 × .9091) 454,550
December 31, 2019 (1,000,000 × .8264) 826,400
December 31, 2020 (1,500,000 × .7513) 1,126,950
2,407,900

Impairment loss
Carrying amount of loan 3,300,000
Present value of cash flows 2,407,900
892,100

Journal entry on December 31, 2017

Loan impairment loss 892,100
Accrued interest receivable 300,000
Allowance for loan impairment 592,100
Example 1
Statement presentation on December 31, 2017
Loan receivable 3,000,000
Allowance for loan impairment ( 592,100)
2,407,900

Journal entry on December 31, 2018

Cash 500,000
Loan receivable 500,000

Allowance for loan impairment 240,790

Interest income 240,790
Example 2
Urban Bank granted a loan of P3,000,000 to a borrower on January 1, 2017. The terms of the
loan were payment in full on December 31, 2022 plus annual interest payment at 8% every
December 31. The first interest payment was made on December 31, 2017.

On December 31, 2017 due to financial difficulties, the borrower informed Urban Bank that it
probably would miss the interest payments for the next two years. After that, the borrower
expects to resume the annual interest payment but the principal would be paid on December 31,
2023 or one year late with interest paid for that additional year.

Present value of cash flows (new)

December 31, 2020 (240,000 × .794) 190,560
December 31, 2021 (240,000 × .735) 176,400
December 31, 2022 (240,000 × .681) 163,440
December 31, 2023 (3,240,000 × .630) 2,041,200
2,571,600
Example 2
Impairment loss
Carrying amount of loan (no accrued interest receivable) 3,000,000
Present value of cash flows 2,571,600
428,400

Journal entry on December 31, 2017

Loan impairment loss 428,400
Allowance for loan impairment 428,400
Example 2
Amortization table
Date Interest received Interest income Amortization Carrying amount
12/31/17 2,571,600
12/31/18 0 205,728 (205,728) 2,777,328
12/31/19 0 222,672 (222,672) 3,000,000
12/31/20 240,000 240,000 0 3,000,000
12/31/21 240,000 240,000 0 3,000,000
12/31/22 240,000 240,000 0 3,000,000
12/31/23 240,000 240,000 0 3,000,000
Journal entry on December 31, 2018
Allowance for loan impairment 205,728
Interest income 205,728