LOAN RECEIVABLE Flashcards
(25 cards)
A financial asset arising from a loan granted by a bank or other financial institution to a borrower or client.
Loan receivable
What is the typical term of a loan?
The repayment periods often cover several years.
How is a loan receivable measured at initial recognition?
At fair value plus transaction costs directly attributable to the acquisition of the financial asset.
What is the fair value of a loan receivable at initial recognition usually equal to?
The transaction price, which is the amount of the loan granted.
Transaction costs directly attributable to the loan.
direct organization costs
How should direct origination costs be treated in the initial measurement of the loan receivable?
They should be included in the initial measurement.
They should be treated as outright expense.
indirect origination costs
How is a loan receivable measured subsequently?
At amortized cost using the effective interest method.
What is included in the calculation of amortized cost?
- Minus principal repayment
- Plus or minus cumulative amortization of any difference between the initial carrying amount and the principal maturity amount
- Minus reduction for impairment or uncollectibility
What happens if the initial amount recognized is lower than the principal amount?
The amortization of the difference is added to the carrying amount.
What happens if the initial amount recognized is higher than the principal amount?
The amortization of the difference is deducted from the carrying amount.
What are origination fees?
Fees charged by the bank against the borrower for the creation of the loan.
What activities do origination fees compensate for?
- Evaluating the borrower’s financial condition
- Evaluating guarantees, collateral, and other security
- Negotiating the terms of the loan
- Preparing and processing the documents related to the loan
- Closing and approving the loan transaction
They are recognized as unearned interest income and amortized over the term of the loan.
origination fees
What are direct origination costs if not chargeable against the borrower?
They are deferred and amortized over the term of the loan.
What happens if origination fees received exceed direct origination costs?
The difference is unearned interest income and the amortization will increase interest income.
What happens if direct origination costs exceed origination fees received?
The difference is charged to direct origination costs and the amortization will decrease interest income.
It is the excess of the carrying amount of the loan over the present value of the cash flows using the original effective rate.
impairment loss
What is the three-stage impairment approach?
- Stage 1: 12-month expected credit loss for instruments without significant credit risk
- Stage 2: Lifetime expected credit loss for instruments with significant credit risk but no objective evidence of impairment
- Stage 3: Lifetime expected credit loss for instruments with objective evidence of impairment
The portion of the lifetime expected credit loss from default events possible within 12 months after the reporting period.
12-month expected credit loss
The expected credit loss that results from all default events over the expected life of the instrument.
lifetime expected credit loss
How is interest income computed under stages 1 and 2?
Based on the gross carrying amount or face amount.
How is interest income computed under stage 3?
Based on the net carrying amount, which is the face amount minus allowance for loan impairment.
The lender may revert from recognizing ‘lifetime credit loss’ to recognizing ‘12-month credit loss’.
improvement in credit risk
