This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Loan receivables (before adoption of IFRS 9): Key differences between U.S. GAAP and IFRSs

IFRS 9, Financial Instruments, was issued in November 2009, replacing the requirements of IAS 39, Financial Instruments: Recognition and Measurement, for classifying and measuring financial assets. Since then, IFRS 9 has been amended to add requirements that were previously included in IAS 39 for classifying and measuring financial liabilities and for recognizing and derecognizing financial assets and financial liabilities. IFRS 9 is effective for annual periods beginning on or after January 1, 2015; early application is permitted.

In this comparison, it is assumed that an entity is applying IAS 39 and has not yet adopted IFRS 9.

Under U.S. GAAP, ASC 310 is the primary source of guidance on loan receivables.

Under IFRSs, IAS 39 is the primary source of guidance on recognizing and measuring financial assets, including loan receivables.

This comparison does not address differences in the recognition and measurement of loan receivables that are accounted for as investments in debt securities under U.S. GAAP. 

The table below summarizes these differences and is followed by a detailed explanation of each difference.

 

U.S. GAAP

IFRSs

Classification and measurement of loan receivables

Generally, loan receivables are classified as either held for sale (HFS) or held for investment (HFI). Depending on their classification, loan receivables are measured at either (1) the lower of cost or fair value (for HFS loans) or (2) amortized cost (for HFI loans).

Loan receivables are also eligible for election of the fair value option under ASC 825-10, in which case they would be carried at fair value, with changes in fair value recognized in earnings.

Loan receivables without quoted prices in an active market are accounted for as loans and receivables at amortized cost, available-for-sale financial assets at fair value with certain changes in fair value recognized in other comprehensive income, or financial assets at fair value through profit or loss. A loan receivable that is quoted in an active market cannot be classified in loans and receivables but may be classified as held to maturity at amortized cost.

HFS or held-for-trading classification

HFS loan receivables are reported at the lower of cost or fair value unless an entity elects, under the fair value option in ASC 825, to carry a loan receivable at fair value, with changes in fair value recognized in earnings.

Loan receivables are classified as held for trading if, at initial recognition, an entity intends to sell those loans immediately or in the near term. In addition, if certain eligibility criteria are met, loan receivables may be designated, at initial recognition, as fair value through profit or loss under the fair value option. Loan receivables classified as held for trading or fair value through profit or loss are measured at fair value, with changes in fair value recognized in profit or loss.

Available-for-sale classification

Loan receivables that are not in the form of a debt security cannot be classified as available for sale.

Entities are permitted to designate loan receivables as available for sale upon initial recognition. Loan receivables classified as available for sale are subsequently measured at fair value, with changes in fair value recognized in other comprehensive income. Interest income is recognized by applying the effective interest rate method, and foreign currency gains/losses and impairment are recognized in profit or loss as they occur.

Recognition of loan impairment

A loan is impaired if it is probable that a creditor will be unable to collect all amounts due.

A loan is impaired if there is objective evidence that impairment exists as a result of a loss event.

Interest method — computation of the effective interest rate

The effective interest rate is computed on the basis of the contractual cash flows over the contractual term of the loan, except for (1) certain loans that are part of a group of prepayable loans, and (2) purchased loans for which there is evidence of credit deterioration. Therefore, loan origination fees, direct loan origination costs, premiums, and discounts typically are amortized over the contractual term of the loan.

The effective interest rate is computed on the basis of the estimated cash flows that are expected to be received over the expected life of a loan by considering all of the loan’s contractual terms (e.g., prepayment, call, and similar options). Therefore, fees, points paid or received, transaction costs, and other premiums or discounts are deferred and amortized as part of the calculation of the effective interest rate over the expected life of the instrument.

Interest method — revisions in estimates

“Retrospective” approach — If estimated payments for certain groups of prepayable loans are revised, an entity may adjust the net investment in the group of loans, on the basis of a recalculation of the effective yield to reflect actual payments to date and anticipated future payments, to the amount that would have existed had the new effective yield been applied since the loans’ origination/acquisition, with a corresponding charge or credit to interest income.

“Cumulative catch-up” approach — If estimated payments are revised, the carrying amount of the financial asset is adjusted to reflect actual receipts and revised estimates of future cash flows by computing the present value of future estimated cash flows at the financial asset’s original effective interest rate and recognizing the adjustment as income or expense within profit or loss. This treatment applies not just to groups of prepayable loans, but to all financial assets that are subject to the effective interest method.

Interest recognition on impaired loans

No specific guidance on the recognition, measurement, or presentation of interest income on an impaired loan, except for loans within the scope of ASC 310-30.

Interest income is recognized by using the interest rate used to discount the future cash flows in the measurement of the impairment loss.

Classification and Measurement of Loan Receivables

Under U.S. GAAP, loan receivables that are not in the form of debt securities generally are classified as either HFS or HFI. Loan receivables that are not held for sale are measured at their outstanding principal balance adjusted for charge-offs, allowances for loan losses, and other amounts in accordance with ASC 310-10-35-47.

Under IFRSs, paragraph 9 of IAS 39 defines loans and receivables as follows:

Loans and receivablesare non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than:

a. those that the entity intends to sell immediately or in the near term, which shall be classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss;
b. those that the entity upon initial recognition designates as available for sale; or
c. those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available for sale.

According to this definition, loan receivables not quoted in an active market must be classified as loans and receivables under IFRSs unless (1) they are held for trading, (2) they are designated as at fair value through profit or loss or available for sale, or (3) there is a risk that the holder may not recover substantially all of its initial investment. A loan receivable that is quoted in an active market cannot be classified in loans and receivables under IFRSs but could potentially be classified as held to maturity.

Held-for-Sale or Trading Classification

ASC 948-310-35-1 states that HFS mortgage loans should be carried at the lower of cost or fair value. In addition, HFS nonmortgage loans should also be carried at the lower of cost or fair value in accordance with ASC 310-10-35-48. While there is no “trading” category for loan receivables in U.S. GAAP, an entity can elect the fair value option for loan receivables under ASC 825-10, in which case they would be carried at fair value with changes in fair value recognized in earnings.

Paragraph 9 of IAS 39 requires entities to classify loan receivables as held for trading if, at initial recognition, they are “acquired or incurred principally for the purpose of selling or repurchasing [them] in the near term.” Loans classified as held for trading are measured at fair value with changes in fair value recognized through profit or loss. Further, if certain eligibility criteria are met, loan receivables may be designated as at fair value through profit or loss under IAS 39’s fair value option (see 825-10 (Q&A 01)).

Available-for-Sale Classification

Under U.S. GAAP, loan receivables that are not in the form of a security cannot be classified as available for sale because they are not within the scope of ASC 320. However, in accordance with ASC 860-20-35-2, loan receivables and other nonderivative financial assets “that can contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment shall be subsequently measured like investments in debt securities classified as available for sale or trading under [ASC] 320,” even if they are not in the form of debt securities.

Under IFRSs, paragraph 9 of IAS 39 permits entities to designate loan receivables that are not held for trading as available for sale upon initial recognition. Loan receivables classified as available for sale are subsequently measured at fair value, with changes in fair value recognized in other comprehensive income. Interest income is recognized by applying the effective interest rate method, and foreign-currency gains or losses and impairment losses are recognized in profit or loss as they occur.

Recognition of Loan Impairment

Under U.S. GAAP, ASC 310-10-35-16 states that a loan is considered impaired if “it is probable that a creditor will be unable to collect all amounts due according to the contractual terms.”1 ASC 310-10-20 defines “probable” as “likely to occur.”

Under IFRSs, paragraph 58 of IAS 39 states that an entity must determine whether there is objective evidence that impairment exists rather than focus on whether it is probable that all amounts due will be collected. As indicated in paragraph 59 of IAS 39, a financial asset is impaired if “there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (‘a loss event’).” A loss event must have an impact on future cash flows “that can be reliably estimated.” Paragraph 59 of IAS 39 lists the following examples of loss events:     

a. significant financial difficulty of the issuer or obligor;
b. breach of contract, such as a default or delinquency in interest or principal payments;
c. the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;
d. it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
e. the disappearance of an active market for that financial asset because of financial difficulties; or
f. 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.

Interest Method — Computation of the Effective Interest Rate

Under U.S. GAAP, the effective interest rate used to recognize interest income on loan receivables generally is computed in accordance with ASC 310-20-35-26 on the basis of the contractual cash flows over the contractual term of the loan. Prepayments of principal are not anticipated. As a result, loan origination fees, direct loan origination costs, premiums, and discounts typically are amortized over the contractual term of the loan. However, ASC 310-20-35-26 indicates that if an entity “holds a large number of similar loans for which prepayments are probable and the timing and amount of prepayments can be reasonably estimated, the entity may consider estimates of future principal prepayments” in calculating the effective interest rate. In addition, if an entity purchases an investment in a loan for which there is evidence of credit deterioration, the effective interest rate is computed on the basis of expected cash flows under ASC 310-30-30-2.

Under IFRSs, paragraph 9 of IAS 39 defines the effective interest rate of a financial asset or financial liability as “the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument . . . to the net carrying amount of the financial asset or financial liability.” Therefore, unlike U.S. GAAP, IAS 39 requires an entity to use the effective interest method to compute the effective interest rate on the basis of the estimated cash flows that are expected to be received over the expected life of a loan by considering all contractual terms (e.g., prepayment, call, and similar options, but excluding future credit losses). As a result, fees, points paid or received, transaction costs, and other premiums or discounts are deferred and amortized as part of the calculation of the effective interest rate over the expected life of the instrument. In the unlikely event that it is not possible to reliably estimate the cash flows or the expected life of the loan, an entity should use the contractual cash flows over the full contractual term. In addition, paragraph AG5 of IAS 39 states that if a financial asset is “acquired at a deep discount that reflects incurred credit losses,” entities should include those incurred losses in the computation of the effective interest rate.

Interest Method — Revisions in Estimates

Under U.S. GAAP, ASC 310-20-35-26 indicates that in applying the interest method, an entity should use the payment terms required in the loan contract without considering the anticipated prepayment of principal to shorten the loan term. However, if the entity can reasonably estimate probable prepayments for a large number of similar loans, the entity may include an estimate of future prepayments in the calculation of the constant effective yield under the interest method for that group of loans. If prepayments are anticipated and there is a difference between the anticipated prepayments and the actual prepayment received, the effective yield should be recalculated to reflect actual payments received to date and anticipated future payments. The net investment in the loans should be adjusted to reflect the amount that would have existed had the revised effective yield been applied since the acquisition or origination of the loans, with a corresponding charge or credit to interest income. In other words, under U.S. GAAP, entities may use a “retrospective” approach in accounting for revisions in estimates related to such groups of loans.

Under IFRSs, IAS 39 requires entities to use a “cumulative catch-up” approach when changes in estimated cash flows occur. Specifically, paragraph AG8 of IAS 39 states, in part:  

If an entity revises its estimates of payments or receipts, the entity shall adjust the carrying amount of the financial asset or financial liability (or group of financial instruments) to reflect actual and revised estimated cash flows. The entity recalculates the carrying amount by computing the present value of estimated future cash flows at the financial instrument’s original effective interest rate . . . . The adjustment is recognised in profit or loss as income or expense.

Interest Recognition on Impaired Loans

The recognition, measurement, or presentation of interest income on an impaired loan is not specifically addressed in U.S. GAAP, except for impaired loans within the scope of ASC 310-30. Potential methods for recognizing interest income on an impaired loan outside the scope of ASC 310-30 include:

  • Interest method — Changes in the present value of a loan that are (1) attributable to the passage of time are accrued as interest income or (2) attributable to changes in the amount or timing of expected cash flows are recognized as bad-debt expense.
  • Bad-debt expense method — The entire change in the present value of the loan is recognized as bad-debt expense that results in the same income statement impact as the interest method without reflecting the discount accretion from the time value of money.
  • Cash basis method — Interest payments received are recognized as interest income as long as that amount does not exceed the amount that would have been earned under the effective interest rate.
  • Modified cost recovery method — The entire payment received is applied against the investment in the loan. Once the recorded investment has been recovered, all excess amounts are recognized as interest income.

Under IFRSs, IAS 39 includes specific guidance on recognizing income on an impaired loan. Paragraph AG93 of IAS 39 states:         

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

____________________

1 For loans within the scope of ASC 310-30, ASC 310-30-35-10 states that a loan is considered impaired if “it is probable that the investor [will be] unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition.”

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.