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Loan receivables (after adoption of IFRS 9 and ASU 2016-01): Key differences between U.S. GAAP and IFRSs

IFRS 9, Financial Instruments, which was issued in November 2009 and most recently amended in July 2014, is effective for annual periods beginning on or after January 1, 2018, although entities can elect to apply it earlier. IFRS 9 supersedes IAS 39, Financial Instruments: Recognition and Measurement.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Although the ASU amends the guidance in U.S. GAAP on the classification and measurement of financial instruments, it does not substantially change the accounting requirements in ASC 310 for loan receivables. For public business entities (PBEs), the ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

Further, in June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly amends the guidance in U.S. GAAP on the measurement of financial instruments. For PBEs that meet the U.S. GAAP definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For PBEs that do not meet the U.S. GAAP definition of an SEC filer, the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. In addition, entities are permitted to early adopt the new guidance for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This comparison does not reflect ASU 2016-13’s amendments.

It is assumed that an entity is applying IFRS 9 and ASU 2016-01 but has not yet adopted ASU 2016-13.

For key differences between U.S. GAAP and IFRSs in the accounting for loan receivables before adoption of IFRS 9 and ASU 2016-01, click here.

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

Under IFRSs, IFRS 9 is the primary source of guidance on recognition and measurement as well as income recognition of loan receivables.

This comparison focuses on differences between U.S. GAAP and IFRSs in the accounting for loan receivables. It 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. Click here for guidance on U.S. GAAP–IFRS differences related to investments in debt securities.

The table below summarizes the key differences between U.S. GAAP and IFRSs in the accounting for loan receivables. It is followed by a detailed explanation of each difference.1

Subject 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 the 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 (FVO) under ASC 825-10, in which case they would be carried at fair value, with changes in fair value recognized in earnings.

A debt instrument (e.g., a loan receivable or debt security) that (1) is held as part of a business model whose objective is to collect contractual cash flows and (2) has contractual cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding generally must be classified and measured at amortized cost. If a debt instrument satisfies the second condition, above, but is held as part of a business model whose objective is achieved by both collecting contractual cash flows and selling the debt instrument, it generally would be classified and measured at fair value through other comprehensive income (FVTOCI).

All other debt instruments held must be classified and measured at fair value through profit or loss (FVTPL).

Debt instruments are eligible for the FVO in limited circumstances (i.e., if an accounting mismatch would otherwise arise). Upon qualification for and election of the FVO, the debt instrument would be carried at fair value, with changes in fair value recognized in profit or loss.

Recognition of impairment losses “Incurred-loss” approach — A loan is impaired if it is probable that a creditor will be unable to collect all amounts due. A loss on an impaired loan is recognized if the amount of the loss can be reasonably estimated. “Expected-loss” approach — An impairment loss on a financial asset accounted for at amortized cost or FVTOCI is recognized immediately on the basis of expected credit losses.
Measurement of impairment losses Specific measurement methods are required for certain loans that are individually considered impaired. Depending on the financial asset’s credit risk at inception and changes in credit risk from inception, as well as the applicability of certain practical expedients, the measurement of the impairment loss will differ. The impairment loss would be measured as either (1) the 12-month credit loss or (2) the lifetime expected credit loss. Further, for financial assets that are credit-impaired at the time of recognition, the impairment loss will be based on the cumulative changes in the lifetime expected credit losses since initial recognition.
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), excluding expected credit losses. 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 receipts are revised, the carrying amount is adjusted to the present value of the future estimated cash flows, discounted at the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets). The resulting adjustment is recognized 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 There is 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 revenue is calculated on the basis of the gross carrying amount, (i.e., the amortized cost before adjusting for any loss allowance) unless the loan (1) is purchased or originated credit-impaired or (2) subsequently became credit-impaired. In those cases, interest revenue is calculated on the basis of amortized cost (i.e., net of the loss allowance).

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. 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. Further, an entity can elect the FVO 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 (click here for more information). Loan receivables that are not HFS but “that management has the intent and ability to hold for the foreseeable future or until maturity or payoff [are measured at their] outstanding principal [balance] adjusted for any chargeoffs, the allowance for loan losses” and other amounts in accordance with ASC 310-10-35-47. Such loan receivables are classified as HFI.

A loan receivable that is in the form of a debt security is accounted for under ASC 320 (click here for more information). Further, the subsequent measurement of loan receivables and other nonderivative financial assets, outside the scope of ASC 815-10, “that can contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment” is similar to that for investments in available-for-sale or trading debt securities under ASC 320, even if they are not in the form of debt securities (see ASC 860-20-35-2).

Under IFRSs, paragraphs 4.1.1–4.1.5 of IFRS 9 provide guidance on classifying and measuring loan receivables and other financial assets. Paragraph 4.1.2 of IFRS 9 states that a debt instrument (e.g., a loan receivable or debt security) that (1) “is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows” and (2) has contractual “cash flows that are [SPPI] on the principal amount outstanding” generally must be classified and measured at amortized cost. In addition, paragraph 4.1.2A of IFRS 9 notes that a debt instrument that (1) “is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets” (emphasis added) and (2) has contractual “cash flows that are [SPPI] on the principal amount outstanding” generally must be classified and measured at FVTOCI. All other debt instruments held must be classified and measured at FVTPL. Further, if the specified condition for election of the FVO in paragraph 4.1.5 of IFRS 9 is met (i.e., an accounting mismatch would arise otherwise), an entity may elect to classify and measure the debt instrument at fair value, with changes in fair value recognized in profit or loss, rather than at amortized cost or at fair value with changes in fair value recognized in OCI.

Recognition of Impairment Losses

Under U.S. GAAP, an entity applies the incurred-loss approach to the recognition of loan impairment. Under ASC 310-10-35-16, 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.”2 ASC 310-10-20 defines “probable” as “likely to occur.” A creditor recognizes any allowance calculated in accordance with ASC 310, as well as allowances for credit losses on loans, if needed for compliance with the requirements for loss contingencies in ASC 450-20 (ASC 310-10-35-34). Under ASC 450-20-25-2, an estimated loss from a loss contingency related to an asset is recognized if it is probable that the asset has been impaired and the amount of the loss can be reasonably estimated.

Under IFRSs, an impairment loss on a financial asset accounted for at amortized cost or FVTOCI is recognized immediately on the basis of expected credit losses.

Measurement of Impairment Losses

Under ASC 310-10-35-22, the creditor measures impairment of loans that are individually identified for evaluation and deemed to be impaired on the basis of “the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is a collateral-dependent loan.”

Under IFRSs, IFRS 9’s dual-measurement approach requires an entity to measure the loss allowance for an asset accounted for at amortized or FVTOCI (other than one that is purchased or originated credit-impaired) at an amount equal to either (1) the 12-month expected credit losses or (2) lifetime expected credit losses.

The 12-month expected credit losses measurement, which reflects the expected credit losses arising from default events possible within 12 months of the reporting date, is required if the asset’s credit risk is (1) low as of the reporting date or (2) has not increased significantly since initial recognition. As noted in paragraph B5.5.22 of IFRS 9, the credit risk is considered low if (1) there is a low risk of default, (2) “the borrower has a strong capacity to meet its contractual cash flow obligations in the near term,” and (3) “adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations.” Paragraph B5.5.23 of IFRS 9 suggests that an “investment grade” rating might be an indicator of low credit risk.

Paragraph 5.5.9 of IFRS 9 states that in assessing whether there has been a significant increase in a financial asset’s credit risk, an entity is required to consider “the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses” since initial recognition. Paragraph B5.5.17 of IFRS 9 provides a nonexhaustive list of factors that an entity may consider in determining whether there has been a significant increase in credit risk. For financial instruments for which credit risk has significantly increased since initial recognition, the allowance is measured as the lifetime credit losses, which IFRS 9 defines as the "expected credit losses that result from all possible default events over the expected life of a financial instrument,” unless the credit risk is low as of the reporting date. This measurement is also required for certain contract assets and trade receivables that do not contain a significant financing component in accordance with IFRS 15, Revenue From Contracts With Customers, and it is available as an accounting policy option for certain trade receivables that contain significant financing components in accordance with IFRS 15 and for certain lease receivables (see paragraph 5.5.15 of IFRS 9).

Purchased or originated credit-impaired financial assets (e.g., distressed debt) are treated differently under IFRS 9. As stated in paragraph 5.5.13 of IFRS 9, for these assets, an entity recognizes only “the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance.” Changes in lifetime expected losses since initial recognition are recognized in profit or loss. Thus, any favorable change in lifetime expected credit losses since initial recognition of a purchased or originated credit-impaired financial asset is recognized as an impairment gain in profit or loss regardless of whether a corresponding impairment loss was recorded for the asset in previous periods.

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 are typically 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 IFRS 9, an entity recognizes interest income by applying the effective interest method. IFRS 9 defines the effective interest rate of a financial asset or liability as the "rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset . . . to the gross carrying amount of a financial asset” (emphasis added). Therefore, the effective interest method in IFRS 9, unlike that in ASC 310-20, requires an entity to compute the effective interest rate on the basis of the estimated cash flows over the expected life of the instrument considering all contractual terms (e.g., prepayment, extension, call, and similar options) but not expected 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. Further, in its definition of an effective interest rate, IFRS 9 states that in rare cases in which it is not possible to reliably estimate the cash flows or the expected life of the financial instrument, an entity should “use the contractual cash flows over the full contractual term.”

Interest Method — Revisions in Estimates

Under U.S. GAAP, whether and how an entity recognizes a change in expected future cash flows of an investment depends on the instrument’s characteristics and which effective interest method the entity is applying. 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, it may include an estimate of future prepayments in the calculation of the constant effective yield under the interest method. If prepayments are anticipated and considered in the determination of the effective yield, and there is a difference between the anticipated prepayments and the actual prepayments 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 group of 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, the original effective interest rate must be used throughout the life of the instrument for financial assets and liabilities, except for certain reclassified financial assets and floating-rate instruments that reset to reflect movements in market interest rates. Upon a change in estimates, IFRS 9 generally requires entities to use a “cumulative catch-up” approach when changes in estimated cash flows occur. Specifically, paragraph B5.4.6 of IFRS 9 states, in part:

If an entity revises its estimates of payments or receipts (excluding modifications in accordance with paragraph 5.4.3 and changes in estimates of expected credit losses), it shall adjust the gross carrying amount of the financial asset . . . to reflect actual and revised estimated contractual cash flows. The entity recalculates the gross carrying amount of the financial asset . . . as the present value of the estimated future contractual cash flows that are discounted at the financial instrument’s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets). . . . 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 that are not within the scope of ASC 310-30 include:

  • Interest method — Changes to 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, the application of the effective interest method depends on whether the financial asset is purchased or originated credit-impaired or on whether it became credit impaired after initial recognition.

When recognizing interest revenue related to purchased or originated credit-impaired financial assets under IFRS 9, an entity applies a credit-adjusted effective interest rate to the amortized cost carrying amount. The calculation of the credit-adjusted effective interest rate is consistent with the calculation of the effective interest rate, except that it takes into account expected credit losses within the expected cash flows.

For a financial asset that is not purchased or originated credit-impaired, paragraph 5.4.1 of IFRS 9 requires an entity to calculate interest revenue as follows:

  • Gross method — If the financial asset has not become credit-impaired since initial recognition, the entity applies the effective interest rate method to the gross carrying amount. IFRS 9 defines the gross carrying amount as “the amortised cost of a financial asset, before adjusting for any loss allowance."
  • Net method — If the financial asset has subsequently become credit-impaired, the entity applies the effective interest rate to the amortized cost balance, which is the gross carrying amount adjusted for any loss allowance.

An entity that uses the net method is required to revert to the gross method if (1) the credit risk of the financial instrument subsequently improves to the extent that the financial asset is no longer credit-impaired and (2) the improvement is objectively related to an event that occurred after the net method was applied (see paragraph 5.4.2 of IFRS 9).

IFRS 9 defines a credit-impaired financial asset as follows:

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include[s] observable data about the following events:
a. significant financial difficulty of the issuer or the borrower;
b. a breach of contract, such as a default or past due event;
c. the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;
d. it is 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. the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.
It may not be possible to identify a single discrete event — instead, the combined effect of several events may have caused financial assets to become credit-impaired.

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1 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.

2 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.”

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