ACT112-Module 2-Receivables-Part 3

ACT112 Intermediate
Accounting 1
Module 2: Receivables-Part 3
Tressa Maye S. Pendang

Department of Accountancy
M2: Receivables
Relevant Standards:
PFRS 9: Financial Instruments
References:
Intermediate Accounting 1 by Valix, 2023 (textbook)
Intermediate Accounting 1 by Millan, 2021
Auditing and Assurance Concepts and Applications Part One by Asuncion, Ngina, et al,
2021
M2: Receivables
M2: Loans Receivable
M2: Receivables
Loans receivable
LEARNING OBJECTIVES:
1. Definition
2. Classification
3. Recognition
4. Measurement – Initial and Subsequent
5. Transactions
6. Presentation and Disclosure
M2: Receivables
Loans receivable
Definition:
Loans Receivable (N/R) – financial asset from loan granted by a bank or financial
institution to a borrower or client
Initial measurement – for financial assets where the entity’s business model for
managing financial assets is to collect contractual cash flows (CCF) and the CCF
consists solely of payments of principal and interests (SPPI), and the entity intends to
hold the FA until maturity, then initial measurement is at Fair Value plus Transaction
Costs. FV + TC.
Loans have contractual cash flows which are principal and interests.
M2: Receivables
Loans receivable
The ff. is the guide for classification of financial assets. Loans fall under the first one.
Business model CCF Classification Initial Subsequent
measurement measurement
- Hold FA to collect CCF SPPI FA at AC FV + TC AC
-Collect CCF and sell FA SPPI FVOCI FV + TC FV
- FA acquired principally to be sold n/a FVPL-HFT FV FV

or repurchased in the near term
- Part of portfolio where there is
evidence of short term profit
taking
Derivative (except if (1) financial
guarantee contract or (2)
designated hedging instrument
Designated as FVPL to eliminate or reduce measurement or recognition inconsistency that
would otherwise arise
M2: Receivables
Loans receivable
For loans receivable, the following is the guide in initial measurement:
 Fair value = Transaction price = amount of loan = Principal
 Transaction costs = direct costs directly attributable to the loan
Ex. Direct origination costs (DOC) >> included in initial measurement
Note: Indirect origination costs (IOC) >> charged immediately to expense.
Note: Origination fees collected (OFC) or received (OFR) from the borrower >>
deducted from direct origination costs
FV + TC = is equal to the present value of the loan.
M2: Receivables
Loans receivable
Initial measurement:
Costs Transaction Amount Rate
FV → Principal XX → at Nominal Rate (NR)or
stated rate
+TC Add: DOC XX
Less: OFR/OFC (XX)
PV XX → compute for EIR*
==
*using trial and error
If FV + TC < (less than) Principal → EIR > (greater than) NR (issued at a discount)
If FV + TC >(greater than) Principal → EIR < (less than) NR (issued at a premium)
We need the EIR in order to prepare the amortization table for subsequent measurement
M2: Receivables
Loans receivable
Subsequent measurement
→ for L/R, it is at amortized cost (AC) using EIR
Carrying amount= PV (CA previous period) + amortization = CA at the end of the period.
Date Interest Interest Amortization (of Present Value
collected Income PV)
A B
Date of note Initial PV Computed
End of period 1 Loan x NR PV x EIR Int. collected – Previous bal. + Amortization
Interest Income
Interest Income
Interest Income
If A – B = negative, or A < B, then add amortization to PV

If A – B = positive, or if A > B, then deduct amortization from PV
M2: Receivables
Loans receivable
Example:
On January 1, 2022, P5,000,000 loan was released to a client by ABC Bank. Principal amount of
P5,000,000 is payable in 3 years. Nominal rate is 12% per annum. Interests are collectible every
Dec 31. Direct origination costs incurred are P168,200 while origination fees charged to the client
amount to 400,000.
Date Interest Interest Income Amortization PV (Carrying
collected (A) (B) (C ) amount)
Prin x NR PV x EIR? (A-B)
1/1/2022 4,768,200*
12/31/2022 600,000 4,768,200 x EIR 600,000 - B 4,768,200 + C
12/31/2023 600,000 ? ? ?
12/31/2024 600,000 ? ? 5,000,000
*Initial PV = Principal 5,000,000 + DOC 168,200 – OFC 400,000 = 4,768,200

M2: Receivables
Loans receivable
Example:
How to get EIR? Thru trial and error and interpolation. PV of 4,768,200 is lesser than principal
amount of P5,000,000 therefore the loan is at a discount (barato), therefore interest income earned
must be greater than interest collected, so EIR must be greater than NR of 12%. Find the “r” that
will result to PV of 4,768,200.
Trial 1: 13%: PV = 5,000,000 x (1.13) -3 + 600,000 x 1 – (1.13)-3 = 4,881,942
0.13
Trial 2: 14%: PV = 5,000,000 x (1.14) -3 + 600,000 x 1 – (1.14)-3 = 4,767,836
0.14
Trial 3: 15%: PV = 5,000,000 x (1.15) -3 + 600,000 x 1 – (1.15)-3 = 4,657,516
0.15
The EIR is nearest to 14%, with only a difference of P364 from PV of 4,768,300. It should ideally
M2: Receivables
Loans receivable
Example:
To complete the amortization table, compute for interest income as of Dec 31, 2022, then compute
amortization and present value. Then proceed to compute interest income for the following period,
then amortization and present value and so on.
collected (A) (B) amount)
Prin x NR 12% PV x EIR 14% (A-B)
1/1/2022 4,768,200
12/31/2022 600,000 667,548 67,548 4,835,748
12/31/2023 600,000 677,005 77,005 4,912,753
12/31/2024 600,000 687,247* 87,247 5,000,000
*Adjust for rounding-off differences.
M2: Receivables
Loans receivable
Journal entries for 2022:
Date Account TItle Debit Credit Remarks
Jan 1, Loan receivable 5,000,000 Cash released to

2022 Cash (5,000,000- 400,000) 4,600,000 borrower is net of
Unearned interest income 400,000 origination fees
Release of loan net of OFC charged.
Unearned interest income 168,200

Cash 168,200
Direct origination costs incurred
Dec 31, Cash 600,000
2022 Unearned interest income 67,548
Interest income 667,548
M2: Receivables
Impairment
EXPECTED CREDIT LOSS (ECL ) → estimate of credit losses over the life of the financial
instrument.
Expected credit loss
12-month ECL portion of lifetime ECL from default credit risk did not
events possible within 12 months increase
after the reporting period significantly
Lifetime ECL ECL from all default events over the credit risk Generally used for
expected life of the financial increased trade receivables
instrument significantly
• Credit risk – risk of default on a debt. Risk that one party to a financial instrument will cause a financial loss
to the other party by failing to discharge an obligation. If debt has collateral, the credit risk may be zero.
• Credit losses = present value of all cash shortfalls
• Default = failure to fulfill obligation
= failure by borrower to pay the loan
.
M2: Receivables
Impairment
EXPECTED CREDIT LOSS MODELS FOR ALL RECEIVABLES. Loans receivable are
under general approach.
ECL GENERAL SIMPLIFIED CREDIT-IMPAIRED OR
CREDIT ADJUSTED (used
rarely)
Applies to: All other loans and Trade receivables Assets that are credit
receivables not under Contract assets impaired at initial
simplified or credit Lease receivables recognition
adjusted approach
Measurement 12-month ECL if credit Lifetime ECL Cumulative change in
of loss risk did not increase lifetime ECL since initial
allowance significantly recognition
. Lifetime ECL if short term
Lifetime ECL if credit risk
increased significantly
M2: Receivables
Impairment
Per PFRS 9 (5.5.1) → an entity shall recognize in P/L an impairment loss or gain, the amount
of expected credit losses (ECL) or reverted, that is required to adjust the loss allowance
Journal entry
To record Impairment loss XX
impairment loss Accrued interest receivable (if any) XX
Allowance for loan impairment XX
To record interest Allowance for loan impairment XX

income Interest income XX
.
To record reversal Allowance for loan impairment XX
of impairment Gain on impairment recovery XX
(recovery)
Note: In computing impairment, carrying amount includes accrued interest.
M2: Receivables
Impairment:
12-month ECL:
ABC Co. issues a 3-year, interest bearing loan of P1,000,000 on August 1, 2021. ABC Co. makes
the ff. estimates of risks and default losses:
Date Risk of default in
Next 12 months Remaining months Loss from default
August 1, 2021 2% 5% 400,000
Dec 31, 2021 3% 12% 350,000
Dec 31, 2022 1% 3% 250,000
M2: Receivables
Impairment:
12-month ECL:
August 1, 2021 2% 5% 400,000
Dec 31, 2021 3% 12% 350,000
Dec 31, 2022 1% 3% 250,000

Aug 1, Impairment loss 8,000 2% x 400,000
2021 Loss allowance 8,000
M2: Receivables
Impairment:
At each reporting date, ABC Co. shall determine whether there has been a significant increase in
credit risk since initial recognition.
August 1, 2021 2% 5% 400,000
Dec 31, 2021 3% 12% 350,000
Dec 31, 2022 1% 3% 250,000
Total risk increased from 7% (2%+5%) to 15% (3%+12%). Since the risk has doubled, this
Is considered as significant increase. ABC Co. shall measure the loss allowance equal to lifetime
ECL. Since the required allowance is 52,500, then entry would be to add 44,500,
Dec 31, Impairment loss 44,500 (15% x 350,000) –
2021 Loss allowance 44,500 8,000
=52,500 – 8,000
M2: Receivables
Impairment:
At each reporting date, ABC Co. shall determine whether there has been a significant increase in
credit risk since initial recognition.
August 1, 2021 2% 5% 400,000
Dec 31, 2021 3% 12% 350,000
Dec 31, 2022 1% 3% 250,000
Total risk has decreased to 4% (1%+3%) which is lower than the initial risk of 7% (2%+5%).
Therefore, ABC Co. shall go back to measuring the loss allowance at 12-month ECL. Since the loss
allowance must be decreased, the entry would reverse the loss allowance and credit gain.
Dec 31, Loss allowance 50,000 (1% x 250,000) –
2022 Impairment gain 50,000 52,500
M2: Receivables
Significant increase in credit risk
- When making the assessment whether the credit risk increased significantly or not,
the entity shall use reasonable and supportable information
- PFRS 9 states that there is a rebuttable presumption that credit risk increased
significantly when contractual payments are more than 30 days past due.
- The assessment may be on an individual basis or collective basis.
- If assessing based on collective basis, the ff. are the examples of shared credit risk
characteristics.
1. Instrument type 6. industry
2. Credit risk ratings 7. geographical location of borrower
3. Collateral type 8. value of collateral relative to financial asset
4. Date of initial recognition
5. Remaining term to maturity
M2: Receivables
Measurement of expected credit losses
- Shall be measured in a manner that reflects:
a. An unbiased and probability-weighted amount that is determined by evaluating a
range of possible outcomes
b. The time value of money – the expected credit loss shall be discounted using the
effective interest rate, except for financial instruments with variable interest rate.
c. Reasonable and supportable information – this means considering past events, current
conditions and forecasts of economic conditions.
M2: Receivables
Credit-impaired financial assets
- When one or more events occurred that have a detrimental impact on the estimated
future cash flows, the asset is credit-impaired
- Examples:
1. Significant financial difficulty of issuer or borrower
2. Breach of contract, ex. Non-payment of interest or principal payments
3. Probably bankruptcy or financial reorganization of the borrower
Etc.
M2: Receivables
Impairment: 3 stage impairment approach
Stage 1 Stage 2 Stage 3
Low credit risk or the Credit risk increased Credit risk increased
credit risk did not significantly significantly
Increase significantly
No objective evidence No objective evidence of There is objective evidence of
of impairment impairment impairment (credit impaired)
Recognize 12-month ECL Recognize Lifetime ECL Recognize Lifetime ECL
Impairment loss: Impairment loss: Impairment loss:
(CA-PV of exp. CF) x (CA-PV of exp. CF) x Probability (CA-PV of exp. CF)
Probability of default of default Prob. of default is 100%
Get PV using original EIR Get PV using original EIR Get PV using original EIR
Interest income: Interest income: Interest income:
Gross CA x original rate Gross CA x original rate Net CA* x original rate
Net CA=Gross CA less allowance

M2: Receivables
Reversal of Impairment
Description PAS 39 PFRS 9
Impairment loss Recorded in P/L Recorded in P/L
Impairment gain Recorded in P/L with limit. The Recorded P/L no limit
reversal shall not result in a
carrying amount higher than the
what the amortized cost would
have been had there been no
. impairment.
Computation of (Lower of PV of future cash flows PV of future cash flows
impairment gain and CA had there been no less CA on date of reversal
impairment) less CA on date of of impairment
reversal of impairment

M2: Receivables
Illustration:
On January 1, 2020, ABC Bank granted a 5-year loan to a borrower for P5,000,000. The loan bears
an interest rate of P10% collectible every Dec 31.
On December 31, 2021, ABC Bank considers the loan impaired and that only P4,000,000 principal
amount will be collected. No cash was received in 2021. The prevailing interest rate is 12%.
Case 1: ABC Bank accrued the interest on Dec 31, 2021 and the entire P4,000,000 will be collected
on maturity date.
Case 2: ABC Bank did not accrue the interest on Dec 31, 2021 and the P4,000,000 will be
collectible as follows:
Date Amount
Dec 31, 2022 P1,500,000
Dec 31, 2023 P2,500,000
M2: Receivables
Illustration:
Case 1: ABC Bank accrued interest and P4,000,000 collectible at maturity.
Carrying amount:
Principal
P5,000,000
Add: Accrued Interest P5M x 10% 500,000
Carrying amount on Dec 31, 2021
P5,500,000
Present value of future cash flow (lumpsum)
P4,000,000 x 1.10-3 =
3,005,200
n=number of years from Dec 31, 2021 to maturity Dec 31, 2024 is 3 years
PV=compute using original EIR which is 10%.
Impairment loss = CA-PV
M2: Receivables
Illustration:
Amortization table:

. PV x EIR 10% (A-B)
12/31/2021 3,005,200
12/31/2022 -0- 300,520 300,520 3,305,720
12/31/2023 -0- 330,572 330,572 3,636,292
12/31/2024 -0- 363,708* 363,628 4,000,000
*Adjust for rounding-off difference
M2: Receivables
Illustration:
Journal entries
Date Journal entry Debit Credit
Dec 31, 2021 Impairment loss 2,494,800

. Accrued interest receivable (if any) 500,000
Allowance for loan impairment 1,994,800
Dec 31, 2022 Allowance for loan impairment 300,520
Jan 1, 2025 Cash 4,000,000
Loan receivable 4,000,000
M2: Receivables
Illustration:
Case 2: ABC Bank did not accrue interest and P4,000,000 collectible in two unequal
installments:
Carrying amount:
Principal
P5,000,000
P5,000,000
Present value of future cash flow (unequal installments)

P1,500,000 x 1.10-1 (rounded-off) P1, 363,650
P2,500,000 x 1.10-2 (rounded-off) 2,066,000
3,429,650
M2: Receivables
Illustration:
Case 2: ABC Bank did not accrued interest and P4,000,000 collectible in two unequal
installments:
Amortization table:
Date Principal Interest Income Amortization PV (Carrying
12/31/2021 3,429,650
12/31/2022 1,500,000 342,965 1,157,035 2,272,615
12/31/2023 2,500,000 227,262 2,272,615 -0-
M2: Receivables
Illustration:
Case 2: ABC Bank did not accrued interest and P4,000,000 collectible in two unequal
installments:
Journal entries for 2021 and 2022
Date Journal entry Debit Credit
Dec 31, 2021 Impairment loss 1,570,350
. Allowance for loan impairment 1,570,350
Dec 31, 2022 Cash 1,500,000
Loan receivable 1,500,000
Allowance for loan impairment 342,965

M2: Receivables
Illustration:
Reversal of impairment:
On January 1, 2020, ABC Bank granted a 5-year loan to a borrower for P5,000,000. The
loan bears an interest rate of P10% collectible every Dec 31.
On December 31, 2021, ABC Bank considers the loan impaired and that only
P4,000,000 principal amount will be collected. No cash was received in 2021. The
prevailing interest rate is 12%. ABC Bank did not accrue the interest on Dec 31, 2021
and the P4,000,000 will be collectible at maturity.
On December 31, 2022, the financial condition of the borrower has improved and it can
pay its entire obligation, including principal and interest at maturity.
M2: Receivables
Illustration:
Impairment loss:
Carrying amount:
Principal
P5,000,000
P5,000,000
Present value of future cash flow (Principal of P4,000,000 only)

P4,000,000 x 1.10-3 (rounded-off)
3,005,200

P1,994,800 Department of Accountancy
This is stage 3 impairment (with objective evidence of impairment)
M2: Receivables
Illustration:
Reversal of impairment
Amortization table:

12/31/2021 3,005,200
12/31/2022 -0- 300,520 300,520 3,305,720
12/31/2023 -0- 330,572 330,572 3,636,292
12/31/2024 -0- 363,708* 363,628 4,000,000
*Adjust for rounding-off difference (rounding off difference should not be more than
1,000 pesos. Usually it is less than 100 pesos.
M2: Receivables
Illustration:
Reversal of impairment
PAS 39
PFRS 9
PV PV of Future Cash flows

Principal 5,000,000
. Interest 4 years
500,000 x 4 2,000,000
At maturity (lumpsum) 7,000,000
PV of 1 for 2 years 0.826446
Present value 5,784,800
CA (actual) CA per amortization table as of
Dec 31,2022 3,305,720
Reversal or gain 2,479,080
========
M2: Receivables
Presentation and Disclosure
Since loans receivable are the trade receivables of a bank or financial institution, these
are normally presented under current assets under one line item “Loans and
Receivables” net of unearned interest income and allowance for credit losses or
allowance for impairment.
Disclosures shall include those required by the Bangko Sentral ng Pilipinas (BSP) for
banks.
The financial statements for Metrobank for 2019 are found in Exhibit 4 of the SEC Form
17-A as of December 31, 2019. The notes are very informative to read.
https://web-assets.metrobank.com.ph/1622089847-2019-sec17a.pdf
End Page
Thank you!
Congratulations! You have finished this part. You may now proceed to the
next part. God bless!

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ACT112 Intermediate

Tressa Maye S. Pendang

M2: Loans Receivable

-Collect CCF and sell FA SPPI FVOCI FV + TC FV

- FA acquired principally to be sold n/a FVPL-HFT FV FV

Note: Indirect origination costs (IOC) >> charged immediately to expense.

FV + TC = is equal to the present value of the loan.

If A – B = negative, or A < B, then add amortization to PV

*Initial PV = Principal 5,000,000 + DOC 168,200 – OFC 400,000 = 4,768,200

*Adjust for rounding-off differences.

Jan 1, Loan receivable 5,000,000 Cash released to

Unearned interest income 168,200

To record interest Allowance for loan impairment XX

Note: In computing impairment, carrying amount includes accrued interest.

Next 12 months Remaining months Loss from default

August 1, 2021 2% 5% 400,000

Dec 31, 2021 3% 12% 350,000

Dec 31, 2022 1% 3% 250,000

Date Account TItle Debit Credit Remarks

Note: In computing impairment, carrying amount includes accrued interest.

Note: In computing impairment, carrying amount includes accrued interest.

Date Interest Interest Income Amortization PV (Carrying

*Adjust for rounding-off difference

Dec 31, 2021 Impairment loss 2,494,800

Present value of future cash flow (unequal installments)

Allowance for loan impairment 342,965

Present value of future cash flow (Principal of P4,000,000 only)

Impairment loss = CA-PV

Date Interest Interest Income Amortization PV (Carrying

PV PV of Future Cash flows

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