Vendor Loan Real Estate

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IFRSNOBODY
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Vendor Loan Real Estate

Post by IFRSNOBODY »

Hi Community,

Great site Marek btw.

Background:
A real estate company as part of the sales of Investment property, sometimes tends to grant financing for the buyers (“Vendor Loans”). This happens either when the buyer is seeking to obtain a bridge loan that will serve him by the time a mortgage loan from the bank is available, or as a method to push forward the sales.

Its not the main activity of the real estate company but it happens sometime that it grants vendor loan to the buyer. This loans can sometimes be for a few months or/max 5 years. And in case of default there is a penalty and the real estate company gets back the sold investment property.

Question:
Should this vendor loans be accounted for under IFRS 9 Financial Instrument or should they be accounted for as part of revenue as per IFRS 15 ?

Anybody got an idea ?
Thanks
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JakobLavrod
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Re: Vendor Loan Real Estate

Post by JakobLavrod »

Hi!
I definitely think this is within the scope of IFRS 9. You are talking about extending loans, in this case, collateralized by the properties. The duration of the loans itself is not critical.

Question out of interest: Does the borrower already have a loan promise from a bank or an already finished mortgage (but not paid out yet) when you give the bridge financing? Otherwise, what if no bank wants to extend a loan, would they stay with your bridge loan?
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IFRSNOBODY
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Re: Vendor Loan Real Estate

Post by IFRSNOBODY »

Hi,

Thanks for your responds. I also think that it should be IFRS 9, since it has the feature of a loan.

But how about that is is significantly financed by the seller for the buyer to buy ? This does not make it IFRS 15 ?

Sometimes the borrower has a loan promise from a bank. And if no banks want to give a loan, then the bridge loan will be extended.
The seller also knows the property better than a bank would so sometimes the interest rate is a little better than what the seller would get at the bank, since the bank has it more difficult to determine their risk.
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JakobLavrod
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Re: Vendor Loan Real Estate

Post by JakobLavrod »

Hi!

Thank you for the response. I have quite limited knowledge of IFRS 15 as I do not work with it on a daily basis, but even if you sell goods on credit (the transaction itself being in scope for IFRS 15) you apply IFRS 9 to the receivable.
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IFRSNOBODY
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Re: Vendor Loan Real Estate

Post by IFRSNOBODY »

Hi,

Thank you for your respond.

So also the interest income you would apply IFRS 9 ?
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JakobLavrod
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Re: Vendor Loan Real Estate

Post by JakobLavrod »

Yes, and you are going to need to compute impairment on the loans as well ;)
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Re: Vendor Loan Real Estate

Post by IFRSNOBODY »

Okay thanks.

Yes an impairment exercise needs to be performed. But I doubt it would leave to an impairment journal since the collateral (Property) of the loan is higher than the value of the loan.
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JakobLavrod
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Re: Vendor Loan Real Estate

Post by JakobLavrod »

I would argue that even if the property is collateralized, a loss should exist:

B5.5.41 The purpose of estimating expected credit losses is neither to estimate a worst-case scenario nor to estimate the best-case scenario. Instead, an estimate of expected credit losses shall always reflect the possibility that a credit loss occurs and the possibility that no credit loss occurs even if the most likely outcome is no credit loss.

The way we have interpreted this is that one should consider at least 1 forward-looking scenario with adverse property prices so that the collateral would no longer cover the exposure.

I agree that it might not be a lot, in particular if the loan is in stage 1 so that this scenario should take place on a 12m basis (which makes it less likely).
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Marek Muc
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Re: Vendor Loan Real Estate

Post by Marek Muc »

PS. Such loans do have implications on revenue recognition:
https://ifrscommunity.com/knowledge-bas ... -component
IFRSNOBODY
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Re: Vendor Loan Real Estate

Post by IFRSNOBODY »

Hi Marek,

Would you be able to elaborate on this ? What are you thinking ?

I understand that with the vendor loan the company is giving much of the finance to enable the sale of the property. But the loans are still at arms length and with commercial substance and never more than 80% of the selling price. I think the loans should still be accounted for according to IFRS 9.
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Re: Vendor Loan Real Estate

Post by Marek Muc »

Initial recognition under IFRS 15 as explained in the knowledge base, then subsequent accounting under IFRS 9
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