Dominican College of

College of Business and Accountancy

Tarlac
Junior Philippine Institute of Accountants

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LOAN RECEIVABLE

Reference: Intermediate Accounting 1

(Valix)
Loan Receivable
A loan receivable is a financial asset arising from a loan
granted by a bank or other financial institution to
a borrower or client.

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 Initial Measurement Of Loan Receivable

At initial recognition, an entity shall measure a

loan receivable at fair value plus transaction
costs that
are directly attributable to the acquisition of the
financial asset

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Subsequent Measurement Of Loan Receivable

• PFRS 9, paragraph 4.1.2, provides that if the business model

loan receivable in managing financial asset is to collect
contractual cash flows on specified dates and the contractual
cash flows are solely payments of principal and interest, the
financial asset shall be measured at amortized cost.

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 Meaning of Amortized Cost

The amortized cost is the amount at which the loan receivable is measured initially:

a. Minus principal repayment

b. Plus or minus cumulative amortization of any difference between the initial carrying amount and
the principal maturity amount
c. Minus reduction for impairment or uncollectibility
- In other words, if the initial amount recognized is lower than the principal amount, the amortization of
the difference is added to the carrying amount. If the initial amount recognized is higher than the
principal amount, the amortization of the difference is deducted from the carrying amount.

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Accounting For Origination Fees
• The origination fees received from borrower are recognized as unearned interest income and amo
over the term of the loan.
If the origination fees are not chargeable against the borrower, the fees are known as "direct originat
costs".

• The direct origination costs are deferred and also amortized over the term of the loan.
Preferably, the direct origination costs are offset directly against any unearned origination fees receiv
If the origination fees received exceed the direct origination costs, the difference is unearned interes
income and the amortization will increase interest income
If the direct origination costs exceed the origination fees received, the difference is charged to "direc
origination costs" and the amortization will decrease interest income

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 ILLUSTRATION

Global Bank granted a loan to a borrower on January 1, 2024. The interest on the loan is
12% payable annually starting December 31, 2024. The loan matures in three years on
December 31, 2024

Principal amount 5,000,000

Origination fees received from borrower 331,800
Direct origination costs incurred 100,000
.

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INITIAL CARRYING AMOUNT OF THE LOAN
.

Principal amount 5,000,000

Origination fees received (331,800)
Direct origination costs incurred 100,000
Initial carrying amount of loan 4,768,200

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Journal entries on January 1, 2024

1. To record the loan:

Loan receivable 5,000,000
Cash 5,000,000

2. To record the origination fees received from borrower:

Cash 331,800
Unearned interest income 331,800

3. To record the direct origination costs incurred by the bank:

Unearned interest income 100,000
Cash 100,000

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 Amortization Table - Effective Interest Method

Date Interest Received Interest Income Amortization Carrying

Amount
Jan. 1, 2024 4,768,200
Dec. 31, 2024 600,000 667,548 67,548 4,835,748
Dec. 31, 2025 600,000 677,005 77,005 4,912,753
Dec. 31, 2026 600,000 687,247 87,247 5,000,000

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Journal entries on December 31, 2024

Cash 600,000
Interest Income 600,000

Unearned Interest Income 67,548

Interest Income 67,548

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Statement Presentation

If a statement of financial position is prepared on December 31, 2024, the loan

receivable is presented
as follows:

Loan receivable 5,000,000

Unearned interest income (231,800-67,548) (164,252)
Carrying amount- December 31, 2019 4,835,748

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 Journal entries on December 31, 2025

Cash 600,000
Interest income 600,000

Unearned interest income 87,247

Interest income 87,247

Cash 5,000,000
Loan receivable 5,000,000

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Impairment of loan

• PFRS 9, paragraph 5.5.1, provides that an entity shall recognize a loss allowance for
expected credit
losses on financial asset measured at amortized cost.
• Paragraph 5.5.3 provides that an entity shall measure the loss allowance for a financial
instrument at an amount equal to the lifetime expected credit losses if the credit risk or that
financial instrument has increased significantly since initial recognition.
• Credit losses are the present value of all cash shortfalls

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 Illustration

International Bank loaned P5,000,000 to Bankard Company on January 1, 2024.

The terms of the loan require principal payment of P1,000,000 each year for 5 years plus
The first principal and interest payment is due on December 31, 2024. Bankard Company
payments on December 31, 2024 and December 31, 2025.
However during 2026, Bankard Company began to experience financial difficulties and w
the required principal and interest payment on December 31, 2027.
On December 31, 2026, International Bank assessed the collectibility of the loan and has
the remaining principal payments will be collected but the collection of the interest is unlik
The loan receivable has carrying amount of P3,300,000 including the accrued interest of
December 31, 2026. International Bank projected the cash flows from the loan on Decem

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Date of cash flow Amount projected
December 31, 2022 500,000
December 31, 2023 1,000,000
December 31, 2024 1,500,000

Using the original effective rate of 10%, the present value of 1 is .9091 for one
period, .8264 for two periods and .7513 for three periods.

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Present value of the cash flows

December 31,2024 (500,000 x.9091) 454,550

December 31, 2025( 1,000,000 x.8264) 826,400
December 31, 2026 (1,500,000 x.7513) 1,126,950
Total present value of cash flows 2,407,900

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Computation of impairment loss

The impairment loss is the difference between the carrying

amount of the loan and the present value of the cash flows.

Carrying amount of loan 3,300,000

Present value of cash flows 2,407,900
Impairment loss 892,100

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 Journal entry on December 31, 2024

Loan impairment loss 892,100

Accrued interest receivable 300,000
Allowance for loan impairment 592,100

The accrued interest receivable is credited directly because the collection of interest is unlikely.
Statement presentation on December 31, 2024

Loan receivable 3,000,000

Allowance for loan impairment (692,100)
Carrying amount 2,407,900

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 Journal entries on December 31, 2025
1. To record the cash collection:
Cash 500,000
Loan receivable 500,000
2. To record the interest income using the effective interest method:
Allowance for loan impairment 240,790
Interest income 240,790
The interest income for 2020 is computed by multiplying the carrying amount of the loan by the effective rate.

Thus, P2,407,900 times 10% equals P240.790.

Note that the recognition of interest income is charged against the allowance for loan impairment account. COURSE CODE
 Journal entries on December 31, 2026

1. To record the cash collection:

Cash 1,000,000
Loan receivable 1,000,000
2. To record the interest income:
Allowance for loan impairment 214,869
Interest income 214,869

Loan receivable - December 31, 2020 2,500,000

Allowance for loan impairment (592,100- 240,790) 351,310
Carrying amount -December 31, 2020 2,148,690
Interest income for 2021 (10% x 2,148,690) 214,869

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 Journal entries on December 31, 2027
1. To record the final cash collection:
Cash 1,500,000
Loan receivable 1,500,000
2. To record the interest income:
Allowance for loan impairment 136,441
Interest income 136,441

Loan receivable-December 31, 2021 1,500,000

Allowance for loan impairment (851,310-214,869) (136,441)
Carrying amount -December 31, 2021 1,363,559
Interest income for 2022 (10% x 1,363,559) 136,356

There is a difference of P85 between P136,441 and P136,356 due to rounding of present
value factors.
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Three-stage impairment approach
Stage 1 - This stage covers debt instruments that have not declined significantly in credit quality
since initial recognition or that have low credit risk.

Under this scenario, a 12-month expected credit loss is recognized

Stage 2 - This stage covers debt instruments that have declined significantly in credit quality since
initial recognition but do not have objective evidence of impairment.

Under this scenario, a lifetime expected credit loss is recognized

There is rebutable presumption that there is a significant increase in credit risk if the contractual
payments are more than 30 days past due.
Stage 3-This stage covers debt instruments that have objective evidence of impairment at the
reporting date.
Under this scenario, a lifetime expected credit loss is recognized.
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 12-month Expected Credit Loss

• A 12-month expected credit loss is defined as the portion of the lifetime expected credit loss from
events that are possible within 12 months after the reporting period.

Lifetime Expected Credit Loss

• Lifetime expected credit loss is defined as the expected credit loss that results from all default ev
the expected life of the instrument.
• Lifetime expected credit loss shall always be recognized for trade receivables through aging, per
accounts receivable and percentage of sales.
Interest income
a.Under stages I and 2, interest income is computed based on the gross carrying amount or face a
b. Under stage 3, interest income is computed based on the net carrying amount which is equal to
carrying amount or face amount minus allowance for credit loss.

COURSE CODE
Illustration: Stage 1 - Low credit risk

On January 1, 2019, a bank loaned P2,000,000 to a borrower

The contract specified an effective interest of 10%, a term of 8 years and interest is payable
annually every December 31.
On December 31, 2024, based on the most relevant information available, the bank
determined that the loan had a 12-month probability of default of 5% and expected to collect
only 80% of the principal.
The present value of 1 at 10% for 7 periods is 0.51.

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 Journal entries for 2024

Jan. 1
Loan receivable 2,000,000
Cash 2,000,000
Dec. 31
Cash (2,000,000 x 10%) 200,000
Interest income 200,000
Impairment loss 59,200
Allowance for loan impairment 59,200
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Carrying amount- December 31, 2024 2,000,000
Probability of collection 80%
Expected cash flow 1,600,000
Multiply by PV of 1 at 10% for 7 periods 0.51
Present value of cash flow -December 31, 2024 816,000

Carrying amount- December 31, 2024 2,000,000

Present value of expected cash low-December 31, 2024 816,000
Expected credit loss 1,184,000
Multiply by probability of default within 12 months 5%
12-month expected credit loss 59,200

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 Loan Receivable

Allowance for loan impairment 2,000,000

12-month expected credit loss (59,200)
Carrying amount- December 31, 2024 1,940,800

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Stage 2 - Significant Increase In Credit Risk But No Objective Evidence Of Impairment

On December 31, 2024, the bank determined that there was a significant increase in the credit risk of the loan receivable
but no objective evidence of impairment.

The bank concluded that there is a 40% probability of default over the remaining life of the loan and the bank expected to
collect only 70% of the principal balance. The present value of 1 at 10% for 6 periods is 0.56

Journal entries for 2024

Dec. 31
Cash 200,000
Interest income 200,000
Impairment loss 427,200
Allowance for loan impairment 427,200 COURSE CODE
Carrying amount-December 31, 2024 2,000,000
Probability of collection 70%
Expected cash flow 1,400,000
Multiply by PV of 1 at 10% for 6 periods 0.56
Present value of expected cash flow 784,000

Carrying amount -December 31, 2024 2,000,000

Present value of expected cash flow - December 31,2024 784,000
Expected credit loss 1,216,000
Multiply by probability of default within 6 years 40%
Lifetime expected credit loss allowance 486,400
Unadjusted allowance-December 31, 2023 (59,200)
Impairment loss 427,200

Loan receivable 2,000,000

Allowance for loan impairment (486,400)
Carrying amount December 31, 2024 1,513,600

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Illustration:Stage 3 - Objective Evidence of Impairment

On December 31, 2024, the borrower was in financial difficulty and the loan was considered impaire
The bank concluded that only 50% of the principal balance will be collected on December 31, 2026.
Interest for 2021 was collected. The present value of 1 at 10% for 5 periods is 0.62.
2024

Dec. 31
Cash 200,000
Interest income 200,000
Impairment loss 893,600
Allowance for loan impairment 893,600
Allowance for loan impairment 1,000,000
Loan receivable 1,000,000

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Write-off of uncollectible loan
Carrying amount December 31, 2024 2,000,000
Probability of collection 50%
Expected cash flow 1,000,000
Present value of 1 at 10% for 5 periods 0.62
Present value of expected cash flow 620,000

Carrying amount-December 31, 2024 2,000,000

Present value of expected cash flow - December 31, 2024 620,000
Lifetime expected credit loss 1,380,000
Unadjusted allowance ( 486,400)
Impairment loss 893,600
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