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Lecture 4 - Debt Restructuring & Loans Receivable

Prepared by: Miguel Albert M. Taveros

added to the initial cost of the receivable. Origination


Fees are deducted from the initial cost of the receivable.
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Debt Restructuring (Asset Swap & Equity Swap)


Asset Swap. Transfer of any asset from debtor.
Treated as a derecognition of a financial liability. (PFRS 9
Par 3.3.1)
Dacion en Pago. Asset swap involving mortgaged
property. This is when the collateral is confiscated by the
financing entity due to the inability of the debtor entity
to pay the loaned amount.
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Sample Problem: Land costing 500,000 and building
costing 4,000,000 with accumulated depreciation of
800,000 were confiscated by X Bank in full
extinguishment of a liability having a carrying amount of
3,000,000 and accrued interest receivable of 200,000.
Transaction costs relating to legal fees in settlement of
debt were 50,000. What is the gain (loss) on
Extinguishment of debt?
Equity Swap. Partial or full settlement of a debt
through the issuance of equity instruments.
Hierarchy of the Measurement of Equity Issued.
1. Fair value of equity issued.
2. Fair value of liability extinguished.
3. Carrying amount of equity issued. (No GLED)
Sample Problem: An entity had 5,500,000 of debt.
On x date, the entity issued share capital with par value
of 2,000,000 and fair value of 4,500,000. The fair value of
the bonds on that date was 4,700,000. Determine the
GLED for each of the hierarchy of measuring equity
instruments issued.
Review of Time Value of Money PV Equations
1 (1 + )
=

1 (1 + )+1
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The present value of a series of equal lumpsum cash


flows is the same as the present value of an annuity
paying the same amount of cash flow each period.
Sample Problem: Find the present value of 5 P500
annuity payments using lumpsum and annuity PV
factors. EIR=12%
Loans Receivable
Initial Measurement. Fair value plus transaction
costs. (PFRS 9 Par 5.1.1) Direct Origination Costs are

Carrying amount at each period (Shortcut). In your


calculator, perform the following operation:
First: Shift -> setup -> 6 -> 5 or 2
Second: Enter the PV -> =
Third: Enter the formula below and press = to
find the PV at each period:
(1 + )
Sample Problem: Find the carrying amount at each
period of a loan with principal amount of 5,000,000,
origination fee of 331,800 and direct origination costs of
100,000. The interest is 12% payable annually.
Loan Impairment and Modification of Terms
Modification of Terms. Loan impairment on the
part of the debtor. Requires the immediate recognition
of gain if there is substantial modification and the
derecognition of the old financial liability and the
recognition of a new financial liability amortized using a
new effective rate if there is no substantial modification.
Loan Impairment. Modification of terms or Debt
Restructuring on the part of the creditor. Allowance for
loan impairment is amortized at the periods with which
the cash flows of the asset are impaired.
Impairment Loss. Amount by which the carrying
amount of the asset exceeds its recoverable amount.
(PAS 36 Par 6) In the case of financial assets at amortized
cost, recoverable amount pertains to the present value
of its future cash flows at the date of impairment
because USUALLY no FVLCD can be obtained from FAs
under Business Model II.
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Sample Problem: On December 31, 2012, Rogue


company signed a 2,000,000 note to Chinabank. The
market interest rate at that time was 12%. The stated
interest rate on the note was 10% payable annually. The
note matures in five years. Unfortunately, because of
lower sales, Rogues financial condition worsened. On
December 31, 2014, Chinabank determined that it was
probable that the company would pay back only
1,200,000 if the principal at maturity. However, it was
also considered likely that the interest would be paid
based on the 2,000,000 loan. What is the impairment
loss?