Alliah Hope Ang BSA I - A11

Chapter 7. Loan Receivable

Questions:

1. Define loan receivable.

It is a financial asset arising from a loan granted by bank or other financial institution
to a borrower or client.

2. Explain the initial measurement of loan receivable.

An entity shall measure a loan receivable initially at fair value plus transaction costs.

3. Explain the subsequent measurement of loan receivable.

Accordingly, a loan receivable is measured subsequently at amortized cost using the

effective interest method.

4. What is the meaning of amortized cost in relation to loan receivable?

It is the amount of which the loan receivable is measured initially:

a. Minus principal payment

b. Plus or minus cumulative amortization of any difference between the initial carrying
amount and the principal maturity amount

c. Minus the reduction for impairment or uncollectibility

5. What are origination fees in relation to a loan?

Lending activities usually precede the actual disbursement of funds and generally
include efforts to identify and attract potential borrowers and to originate a loan.
Origination fees are fees that are charged by the bank against the borrower for the
creation of the loan.

6. Explain the accounting for origination fees.

The origination fees received from borrower are recognized as unearned interest
income and amortized over the term of the loan.
7. Explain direct origination cost.

Origination fees that are not chargeable to the borrower are fees known as direct
origination cost. 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 received.

8. Explain the treatment of origination fees received from borrower and direct origination
costs incurred by the lender.

If the origination fees received exceed the direct origination costs, the difference is
unearned interest income and the amortization will increase interest income. Both
origination fees received and direct organization cost are included in the measurement of
the loan receivable. Also, if the direct organization costs exceed the origination fees
received, the differences charged to “direct organization costs” and the amortization will
decrease interest income.

9. Explain the treatment of indirect origination cost incurred by the lender.

Indirect organization costs should be treated as outright expense.

10. Explain the measurement of impairment loan.

It can be measured as the difference between the carrying amount and the present
value of estimated future cash flows discounted at the original effective rate.

11. What is the computation of the carrying amount of the loan receivable subsequent to
impairment?

The carrying amount of the loan receivable shall be reduced either directly or through
the use of an allowance account.

12. Explain the meaning of credit risk.

Credit risk is the risk that one party to a financial instrument will cause financial loss
for the other party by failing to discharge an obligation. For example, if an entity issued a
collateralized liability and noncollateralized liability that are otherwise identical, the credit
risk of the two liabilities will be different. The credit risk of the collateralized liability is
surely less than the credit risk of the noncollateralized liability.

13. Define credit loss.

 Credit losses are present value of all cash shortfalls.

14. Distinguish 12-month expected credit loss and lifetime expected credit loss.

A 12-month expected credit loss is defined as the portion of the lifetime expected
credit loss from default events that are possible within 12 months after the reporting
period. However, Lifetime credit expected credit loss is defined as the expected credit loss
results from all default events over the expected life of the instrument and shall be always
recognized for trade receivables through aging, percentage of accounts receivable and
percentage of sales.

15. Explain the three-stage approach of loan impairment.

The first stage of impairment approach covers the debt instruments that have not
declined significantly in credit quality since initial recognition or that have low risk.
Twelve-month expected credit loss is recognized.

The second stage covers debt instruments that have declined significantly in credit
quality since initial recognition but do not have objective of evidence of impairment.
Lifetime expected credit loss is recognized under this scenario.

The third stage covers debt instruments that have objective evidence of impairment at
the reporting date.