A loan receivable is a financial asset arising from a loan granted by a bank or other financial institution to a borrower or client.
The initial measurement is the 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 is the transaction price, meaning the amount of the loan granted.
Transaction costs are directly attributable to the loan receivable include origination fees.
Direct origination costs are 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.