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Intermediate
Accounting 1
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Loan Receivable
by: Prof. Ernie D. Tano, CPA, MBA
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A Loan Receivables 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 LR

- An entity shall measure a loan receivable initially at fair

value plus transaction costs that are directly attributable to
the acquisition of the financial asset.

- The fair value of the loan receivable at initial recognition

is normally the transaction price, meaning the amount of
loan granted.
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Initial measurement of LR

- The transaction costs that are directly attributable to

the loan receivable include direct origination costs.

- Direct origination costs should be included in the initial

measurement of the loan receivable. However, indirect
origination costs should be treated as outright expense.
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Subsequent measurement of LR
PFRS 9, par. 4.1.2
- If the business model 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.

A loan receivable is measure at amortized cost using the

effective interest method
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Meaning of amortized cost

- The amortized cost is the amount at which the loan receivable
is measure 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

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Origination Fees
- The fees charged by the bank against the borrower for the
creation of the loan which include the following:
a. Evaluating the borrower’s financial condition

b. Evaluating guarantees, collateral & other securities

c. Negotiating the terms of the loan

d. Preparing and processing the loan documents

e. Closing and approving the loan transaction

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Accounting for Origination Fees

- The origination fees received from borrower are recognized as

unearned interest income and amortized over the term of loan.

- If the 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.
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Accounting for Origination Fees

- Preferably, the direct origination costs are offset directly against
any unearned 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
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Accounting for Origination Fees

- 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.
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Accounting for Origination Fees

Illustration:
Global Bank granted a loan to a borrower on January 1, 2020. The interest on the loan is
12% payable annually starting Dec. 31, 2020. The loan matures in three years on Dec. 31,
2022.

Principal Amount 5,000,000 Principal Amount 5,000,000

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

Initial carrying amount of

4,768,200
loan
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Accounting for Origination Fees

Journal entries on Jan. 1, 2020

1. To record the loan the P5,000,000 loan:

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

2. To record the origination fees received from the borrower of P331,800:

Cash 331,800
Unearned interest income 331,800

3. To record the direct origination costs incurred by the bank of P100,000:

Unearned interest income 100,000
Cash 100,000
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Accounting for Origination Fees

Nominal interest rate vs. Effective interest rate

Principal P50,000
Interest rate 12%

P50,000 – 6,000 P6,000 ÷ 44,000

Principal Interest Net Effective Interest

12% Proceed
Interest to be paid 50,000
after 1 year 6,000 50,000 12%
Interest deducted 50,000
in advance 44,000 13.6%
6,000
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Accounting for Origination Fees

Amortization table – effective interest method

P4,768,200 x
14% P667,548-600,000 P4,768.200+67,548

Date Interest received Interest Income Amortization Carrying amount

(12%) (14%)
1/01/2020 4,768,200
12/31/2020 600,000 667,548 67,548 4,835,748
12/31/2021 600,000 677,005 77,005 4,912,753
12/31/2022 600,000 687,247 87,247 5,000,000
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Accounting for Origination Fees

Journal entries on Dec. 31, 2020

Cash 600,000
Interest income 600,000

Unearned interest income 67,548

Interest income 67,548
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Accounting for Origination Fees

Statement presentation on Dec. 31, 2020

Loan receivable 5,000,000

Unearned interest income (231,800 – 67,548) (164,252)
Carrying amount – Dec. 31, 2020 4,835,748

The carrying amount is actually the amortized cost.

Journal entries on Dec. 31, 2021

Cash 600,000
Interest income 600,000

Unearned interest income 77,005

Interest income 77,005
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Accounting for Origination Fees

Journal entries on Dec. 31, 2022

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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Accounting for Origination Fees

Problem 7-3
Pauper Bank granted a loan to a borrower on January 1, 2020. The interest on the loan 8%
payable annually starting December 31, 2020. The loan matures in three years on
December 31, 2022.

Principal Amount 3,000,000 Principal Amount 3,000,000

Origination fees received 100,000 Origination fees received
from borrower from borrower (100,000)
Direct origination costs 260,300 Direct origination costs
incurred incurred 260,300

Initial carrying amount of

loan 3,160,300
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Accounting for Origination Fees

Journal entries on Jan. 1, 2020

1. To record the loan :

Loan receivable 3,000,000
Cash 3,000,000

2. To record the origination fees received from the borrower of P100,000:

Cash 100,000
Direct Origination Cost 100,000

3. To record the direct origination costs incurred by the bank of P260,300:

Direct Origination Cost 260,300
Cash 260,300
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Accounting for Origination Fees

Journal entries on Dec. 31, 2020
Cash 240,000
Interest income 240,000

Unearned interest income 50,382

Interest income 50,382

Date Interest received Interest Income Amortization Carrying amount

(8%) (6%)
1/01/2020 3,160,300
12/31/2020 240,000 189,618 50,382 3,109,918
12/31/2021 240,000 186,595 53,405 3,056,516
12/31/2022 240,000 183,447 56,513 3,000,000
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Accounting for Origination Fees

Date Interest received Interest Income Amortization Carrying amount
(8%) (6%)
1/01/2020 3,160,300
12/31/2020 240,000 189,618 50,382 3,109,918
12/31/2021 240,000 186,595 53,405 3,056,516
12/31/2022 240,000 183,447 56,513 3,000,000

Statement presentation on Dec. 31, 2020

Noncurrent asset
Loan receivable 3,000,000
Direct Origination Cost 109,918
Carrying amount – Dec. 31, 2020 3,109,918
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Accounting for Origination Fees

Nominal Effective Nominal Effective
Interest < Interest Interest >
Rate Interest
Rate Rate Rate
Date Interest Interest Amortiz Carrying Date Interest Interest Amortiza Carrying
received Income ation amount received Income tion amount
(12%) (14%) (8%) (6%)
1/01/2020 4,768,200 1/01/2020 3,160,300
12/31/2020 600,000 667,548 67,548 4,835,748 12/31/2020 240,000 189,618 50,382 3,109,918
12/31/2021 600,000 677,005 77,005 4,912,753 12/31/2021 240,000 186,595 53,405 3,056,516
12/31/2022 600,000 687,247 87,247 5,000,000 12/31/2022 240,000 183,447 56,513 3,000,000

Conclusion:
NR < ER ; CA < FV
NR > ER ; CA > FV
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End of Presentation.
Reference:
Intermediate Accounting 1a, 2019 Edition
by: Zeus Vernon B. Millan

Intermediate Accounting 1, 2020 Edition by:

Conrado T. Valix, et.al