IMPAIRMENT OF NOTES/LOAN RECEIVABLES

Þ PFRS 9 requires an entity to measure its expected credit losses (impairment loss) not necessarily based on loss event but based on information that includes
past experiences, present condition and future expectations. PFRS 9 requires three stages in impairment measurement and recognition:

§ Recognize impairment loss in profit or loss

Credit risk (risk of using an allowance account which is based on
STAGE 1 default) has not 12 month expected credit loss.
increased significantly
(low risk) § Interest income is calculated based on the
(Insignificant decline in gross carrying amount.
value)
§ Impairment loss can be recognized either at
the time of recognition of financial asset or
none at all.

§ Recognize impairment loss in profit or loss

Credit risk (risk of using an allowance account which is based on
default) has increased lifetime expected credit loss.
STAGE 2 significantly
(Significant decline in value)
§ Interest income is calculated based on the
gross carrying amount.

§ Recognize impairment loss in profit or loss

which is based on lifetime expected credit
loss.
Credit impaired (there is
an objective evidence of § Interest income is calculated based on the net
STAGE 3 impairment *) carrying amount (receivable balance less any
(Significant decline in value) related allowance and additional impairment
losses)

§ Impairment loss is computed as the excess of

the receivables carrying value over present
EMPV value of expected future cashflows discounted
at the original effective rate.
12 months expected loss - any probable loss likely to happen within the next 12 months.
Lifetime expected loss – expected loss over the life/term of the note/loan.
Allowance for uncollectible notes – a contra-account to notes receivable for allowance on 12 months expected credit losses.

*The following loss events may indicate that there is objective evidence of impairment:
a.) Significant financial difficulty of the issuer or obligor
b.) Breach of contract
c.) Debt restructuring
d.) Probability that the borrower will enter bankruptcy or other financial reorganization.
e.) The disappearance of an active market for the financial asset because of financial difficulty.
f.) Decrease in estimated future cashflows from a group of financial assets since the initial recognition, although the decrease cannot yet be identified with
the individual financial assets in the group.

Þ In STAGE 3, two values are compared to measure the additional impairment loss:

PRESENT VALUE OF ESTIMATED FUTURE CASH

CARRYING VALUE OF THE
FLOWS DISCOUNTED AT THE ORIGINAL EFFECTIVE
NOTE/LOAN VERSUS RATE OF THE LOAN

§ PRINCIPAL PLUS ANY ACCRUED

INTEREST OUTSTANDING AT § BASED ON RESTRUCTURED OR
THE DATE OF IMPAIRMENT MODIFIED TERMS

TAKE NOTE:

PRESENT VALUE OF ESTIMATED FUTURE CASH

CARRYING VALUE OF THE
IF NOTE/LOAN > FLOWS DISCOUNTED AT THE ORIGINAL EFFECTIVE = IMPAIRED! Recognize impairment loss.
RATE OF THE LOAN

PRESENT VALUE OF ESTIMATED FUTURE CASH

CARRYING VALUE OF THE
IF NOTE/LOAN </= FLOWS DISCOUNTED AT THE ORIGINAL EFFECTIVE = NOT IMPAIRED!
RATE OF THE LOAN

EMPV
ILLUSTRATION:

On January 1,2019, ABC Company received a 12% note for P 300,000 due on December 31,2023 from DEF Company for lending purposes. The interest is payable
every December 31. The prevailing interest rate for the note of this type is 12%. Also, on this date, the company expects that P 30,000 of this note will be
defaulted and within the next 12 months, the probability of default is at 2%.

On December 31,2019, there is no significant increase in the credit risk of the note and ABC company still expects P 30,000 to be defaulted with a probability of
2.5% for the next 12 months.

On December 31,2020, there is a significant increase in the credit risk of the note due to the decline in the growth of the industry where DEF is currently
operating. ABC expected credit loss has risen to P 35,000.

On December 31,2021, DEF company is now experiencing financial difficulty and has defaulted the payment of interest for this period. DEF Company has
negotiated for a restructuring of its note. The restructuring agreement calls for P 67,200 annual payment with first payment due on December 31,2022. No
further interest will be collected during the extended 5-year term. On this date the prevailing market rate is 15%.

Entries:
January 1, 2019 Notes Receivable 300,000
Cash 300,000

STAGE 1 Impairment loss 600

(Recognition only of Allowance for uncollectible notes 600
12-months expected ( 30,000 x 2%)
loss)
December 31,2019
Cash 36,000
Interest Income 36,000

STAGE 1 Impairment loss 150

(Recognition only of Allowance for uncollectible notes 150
12-months expected (30,000 x 2.5% = 750)
loss) 750 – 600*= 150
*outstanding balance of allowance for uncollectible notes at the
beginning of the year

December 31,2020

EMPV
 Cash 36,000
Interest Income 36,000

STAGE 2 Impairment loss 34,250

(Recognition Allowance for uncollectible notes 34,250
lifetime expected
loss) 35,000* – 750** = 34,250
*expected loss over the life of the note
** total impairment loss already recognized on stage
1

December 31,2021
Interest Receivable 36,000
Interest Income 36,000
defaulted

Carrying value of the note: Present value of future cash inflows based on original
effective rate:
NR – 300,000 PV factor of ordinary annuity for 5 periods X P 67,200
Interest Receivable – 36,000 3.6047762…. X P 67,200
Allowance for Uncollectible notes – (35,000)
P 301,000 P 242,240.96

IMPAIRMENT LOSS = P 58,759.04

Impairment loss 58,759.04

STAGE 3 Allowance for uncollectible notes 35,000
(Recognition Restructured Notes Receivable 336,000
lifetime expected Discount on Restructured Notes Receivable 93,759.04
loss) Notes Receivable 300,000
Interest Receivable 36,000

December 31,2022

EMPV
NEW AMORTIZATION TABLE BASE ON NEW AGREEMENT:
Interest
Date Income Principal Payment Applied to Principal Carrying Value of Note
December 31,2021 242,240.96

December 31,2022 29,068.92 67,200.00 38,131.08 204,109.88

December 31,2023 24,493.19 67,200.00 42,706.81 161,403.06

December 31,2024 19,368.37 67,200.00 47,831.63 113,571.43

December 31,2025 13,628.57 67,200.00 53,571.43 60,000.00

December 31,2026 7,200.00 67,200.00 60,000.00 -

Discount of Restructured Notes Receivable 29,068.92

Interest Income 29,068.92

Cash 67,200
Restructured Notes Receivable 67,200

December 31,2023
Discount of Restructured Notes Receivable 24,493.19
Interest Income 24,493.19

Cash 67,200
Restructured Notes Receivable 67,200

December 31,2024
Discount of Restructured Notes Receivable 19,368.37
Interest Income 19,368.37

Cash 67,200
Restructured Notes Receivable 67,200

December 31,2025
Discount of Restructured Notes Receivable 13,628.57
Interest Income 13,628.57

EMPV
 Cash 67,200
Restructured Notes Receivable 67,200

December 31,2026
Discount of Restructured Notes Receivable 7,200
Interest Income 7,200

Cash 67,200
Restructured Notes Receivable 67,200

FREQUENTLY ASKED QUESTIONS:

1. How much is the impairment loss to be recognized for year 2019? 750
2. How much is the interest income to be recognized for year 2019? 36,000
3. How much is the carrying value of the note receivable on December 31,2019? 299,250
4. What total amount must be presented in the profit or loss section of the Statement of Comprehensive income related to the notes for year 2019? 35,250
5. How much is the impairment loss to be recognized for year 2020? 34,250
6. How much is the interest income to be recognized for year 2020? 36,000
7. How much is the carrying value of the note receivable on December 31,2020? 265,000
8. What total amount must be presented in the profit or loss section of the Statement of Comprehensive income related to the notes for year 2020? 1,750
9. How much is the impairment loss to be recognized for year 2021? 58,759.04
10. How much is the interest income to be recognized for year 2021? 36,000
11. How much is the carrying value of the note receivable on December 31,2021? 242,240.96
12. What total amount must be presented in the profit or loss section of the Statement of Comprehensive income related to the notes for year 2021?
(22,759.04)
13. How much is the impairment loss to be recognized for year 2022? 0
14. How much is the carrying value of the note receivable on December 31,2022? 204,109.88
15. How much is the interest income to be recognized for year 2022? 29,068.92
16. What total amount must be presented in the profit or loss section of the Statement of Comprehensive income related to the notes for year 2022? 29,068.92

EMPV