LOANS RECEIVABLE AND IMPAIRMENT
effective interest rate
Impairment of Financial Assets – No actual impairment –
Financial assets shall not be measured at amounts higher than
the expected amount of cash to be received (net realizable
value). In addition, PRFS 9 requires entities to recognize
impairment losses from financial assets even if there is no
actual impairment (that is, expected credit loss or ECL)
The most common way to compute for the estimated
impairment of financial asset when there is no actual
impairment is the PD x LGD x EAD
 PD means Probability of Default (expressed as %) It
indicates how likely the counterparty in a financial asset
will fail to pay the amount due
 LGD means Loss Given Default (expressed as %) It
indicates the portion of the financial asset that cannot be
recovered in case the counterparty defaults
 EAD means Exposure At Default (expressed at financial
amounts) It indicates the carrying amount of financial
asset when the counterparty defaults
Expected Credit Loss (ECL) shall be measured using the 12-
month ECL when there is no significant increase in credit risk.
On the other hand, ECL shall be measured using the lifetime
ECL when there is a significant increase in credit risk. Lifetime
ECL is higher than 12-month ECL. The amount of ECL will
increase continually before the happening of actual impairment
of the financial asset
The amount of Expected Credit Loss (ECL) is reported as a
contra-asset account and any changes to it are reported in
profit or loss
Impairment of Financial Assets – With Actual Impairment – A
financial asset is credit-impaired when one or more events that
have a detrimental impact on the estimated future cash flows
of that financial asset is credit impaired include observable data
about the following events:
a. Significant financial difficulty of the issuer or the borrower
b. A breach of contract, such as a default or past due event
c. The lender of the borrower, for economic or contractual
reasons relating to the borrower’s financial difficulty,
having granted to the borrower a concession that the
lender would not otherwise consider
d. It is becoming probable that the borrower will enter
bankruptcy or other financial reorganization
e. The disappearance of an active market for that financial
asset because of financial difficulties; or
f. The purchase or organization of a financial asset at a deep
discount that reflects the incurred credit losses
The amount of impairment loss is measured as the difference
between the carrying amount of the financial asset and the
expected amounts to be received discounted at original
Scope of Impairment Procedures – the preceding discussions
on impairment of financial assets shall be applied to the
following:
a. Financial assets at amortized cost
b. Financial assets at FVTOCI (debt securities only)
Financial assets at FVTPL are not covered by impairment
provisions since decrease in fair values related to supposed
impairment are already reported in Profit/Loss. Equity
securities at FVTOCI are not also covered since the gains are
reported in OCI and any decrease in fair value because of
impairment are already reflected in the decrease in its fair
value
Loans Receivable
Loans receivable are receivables arising from lending of funds
primarily made by financial institutions such as banks and
insurance companies. Loans receivable are normally measured
initially at their fair value (which is normally equal to their face
amount) plus or minus origination costs incurred ad origination
fees received. The following formalizes the computation of
initial measurement of loans receivable:
Face amount of loans receivable
Add: Direct origination costs
Less: Origination fees received
Initial carrying amt. of loans receivable
The difference between the face amount of the loan and its
initial measurement has no profound effects as follows:
a. If the initial measurement is LOWER than the face
amount, the amount of EIR is HIGHER than the Stated Rate
of the loan
b. If the initial measurement is HIGHER than the face
amount, the amount of EIR is LOWER than the Stated Rate
of the loan
Indirect origination costs shall be expensed outright when
incurred. One will notice that loans receivable is normally
measured at amortized cost because they are held in business
model of holding them to collect contractual cash flows and
passing the SPPI test. However, they are not precluded to be
measured at FVTPL or FVTOCI especially when the contractual
cash flows fail the SPPI test or held in different business
model