A loan receivable is 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 transaction costs that are directly attributable to the
acquisition of the financial asset.
Fair
value of the loan receivable at initial recognition
- transaction price, meaning the
amount of the loan granted.
Transaction
costs – are directly attributable to the loan receivable
include origination fees.
Direct
origination costs – included in the initial measurement
of the loan receivable.
Subsequent
measurement – A loan receivable is subsequently
measured at amortized cost using the
effective interest method.
Amortized
cost
– is the amount at which the receivable is measured initially minus principal payment, plus or minus the cumulative amortization
of any difference between the initial amount recognized and the principal
maturity amount, minus reduction for
impairment or uncollectibility.
If the 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.
Origination
fees
– The fees charged by the bank against the borrower for the creation of the
loan. It include compensation for activities such as evaluating the borrower’s
financial condition, evaluating guarantees, collateral and other security,
negotiating the terms of the loan, preparing and processing documents and
closing the loan transaction.
The origination fees received from borrower are
recognized as unearned interest income
and amortized over the term of the loan.
The direct origination fees are not chargeable against the borrower,
the fees are known as “direct origination
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 origination fees
received.
If the origination fees received exceed the direct
origination costs, the difference is unearned interest income and the
amortization will increase interest
income.
If the direct origination costs exceed the origination fees received,
the difference is charged to “direct origination costs” and the amortization will decrease interest income.
Accordingly, the origination fees received and the direct origination costs are included
in the measurement of the loan receivable.
PAS
39, paragraph 58, provides that an entity shall assess
at every end of reporting period whether there is objective evidence that a financial asset or group of financial
assets is impaired.
If such evidence
exists, the entity shall determine and recognize the amount of any impairment loss.
Objective
evidence of impairment may result from the following “loss events” occurring after the
initial recognition of the financial asset:
- Significant
financial difficulty of the issuer or obligor.
- Breach of contract,
such as default or delinquency in interest or principal payment.
- Debt restructuring
– The lender, for economic or legal reason relating to the borrower’s
financial difficulty, grants to the borrower a concession that the lender
would not otherwise consider.
- Probability
that the borrower will enter bankruptcy
or other financial reorganization.
- The
disappearance of an active market for the financial asset because of
financial difficulty.
- Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.
PFRS
9, paragraph 5. 2. 2, provides that if there is evidence that an impairment
loss on a loan receivable carried at amortized cost has been incurred, the
amount of the loss is measured as the “difference between the carrying amount
of the loan receivable and the present value of estimated future cash
flows discounted at the original effective rate of the loan.”
The
carrying amount of the loan receivable shall be reduced either directly or through the use of an allowance account.
The
amount of the impairment loss shall be recognized in profit or loss.
