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Loans Receivable: Effective Rate

Loans receivable arise from loans granted by financial institutions to borrowers. They are initially measured at fair value plus transaction costs and are subsequently measured at amortized cost using the effective interest method. The carrying amount is reduced for impairment losses, which are estimated based on probability-weighted outcomes and reasonable supporting information. Origination fees charged to borrowers are recognized as unearned income and amortized over the loan term, while direct origination costs are offset against unearned fees.

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115 views2 pages

Loans Receivable: Effective Rate

Loans receivable arise from loans granted by financial institutions to borrowers. They are initially measured at fair value plus transaction costs and are subsequently measured at amortized cost using the effective interest method. The carrying amount is reduced for impairment losses, which are estimated based on probability-weighted outcomes and reasonable supporting information. Origination fees charged to borrowers are recognized as unearned income and amortized over the loan term, while direct origination costs are offset against unearned fees.

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Jonathan Navallo
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CHAPTER 12:

LOANS RECEIVABLE
Financial asset arising from a loan granted by a
bank or other financial institution to a borrower EFFECTIVE RATE
or client
 computed through the "trial and error"
May be short term; in most cases, the and "interpolation approach"
repayment periods cover several years  In practice, IT is easily determined
through the use of financial calculator.

INITIAL MEASUREMENT
Fair value (+) transaction costs that are directly EFFECTIVE INTEREST METHOD
attributable to the acquisition of financial asset
 Interest received = principal x nominal
Transaction price – amount of the loan rate
granted  Interest income = carrying amount x
effective rate
Direct organization cost – included in initial
measurement of the loan receivable
Indirect organization cost – treated as STATEMENT PRESENTATION
outright expense
 Carrying amount = amortized cost

SUBSEQUENT MEASUREMENT
IMPAIRMENT OF LOAN
Amortized cost – amount at which the loan
receivable is measured initially: Credit losses - present value of all cash
shortfalls
a) (-) principle repayment
b) (+,-) cumulative amortization of any Expected credit losses - estimate of credit
difference between initial carrying losses over the life of the financial instrument
amount and principal maturity amount
c) (-) reduction for impairment or
uncollectibility MEASUREMENT OF IMPAIRMENT
If the initial amount recognized is… When measuring expected losses, the entity
 lower than the principal amount, should consider:
amortization of the difference is added 1. Probability-weighted outcome
to the carrying amount 2. Time value of money
 higher than the principal amount, 3. Reasonable and supportable information
amortization of the difference is
deducted to the carrying amount *PFRS does not prescribe a particular method;
the carrying amount of the loan receivable shall
be reduced either directly or through the use of
an allowance account
ORIGINATION FEES – charged by the bank
against borrower; recognized as unearned
interest income & amortized over the term of
loan CREDIT RISK – risk that one party to a
financial instrument will cause a financial loss
Direct origination costs – not chargeable or the other party by failing to discharge an
against borrower; offset directly against any obligation
unearned origination fees received
*The organization fees received and the direct
origination cost are included in the
measurement of the loan receivable

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