FINANCIAL ASSETS

CHAPTER 6
Introduction
• Financial Instrument - is any contract that gives rise to both a financial
asset of one entity and a financial liability or equity instrument of
another entity.
• Financial asset is any that is:
a) cash
b) an equity instrument of another entity;
c) a contractual right to receive cas or another financial asset from another entity
d) a contractual right to exchange financial instrument with another entity under
condidtions that are potentially favorable or;
e) a contract that will or may be settled in the entity's own equity instruments
• financial liability - is any liability that is
a) a contractual obligation to deliver cash or another financial asst to another
entity;
b) a contactual obligation to exchange financila assets or financial liabilties
with another entity under conditions that are potentially unfavorable to the
entity; or
c) a contract that will or may be settled in the entity's own equity instruments
• Equity Instruments - is any contract that evidences a residual interest
in the assets of an entity after deducting all of its liabilities.
INITIAL RECOGNITION
• A financial asset is recognized when an entity becomes a party to the
contractual provisions of the instrument.
INITIAL MEASUREMENT
• financial assets are initially measured at fair value plus transaction
cost, except for fiancial assets at fair value through surplus or deficit
whose transaction cost are expensed
• transaction cost are incremental cost that are directly attributable to the acquisition,
issue, or disposal of a financial instrument. An incremental cost is one that would not
have been incurred if the entity had not acquired, issued or disposed the financial
instrument. transaction cost include:
• fees and commisions paid to agents,
• advisers
• brokers and dealers
• levies by regulatory agencies and securities and exchanges
• transfer taxes and duties
CASH AND CASH EQUIVALENTS
• cash - comprises cash on hand, cash in bank, and cash treasury
accounts
adustments fro unreleased commercial checks
• unrealeased checks are checks drawn but not yet given to the payees
as of the end of the period. unreleased checks are reverted back to
cash as follows.
DATE Cash in Bank, Local Currency-current xx
Accounts Payable (or other liabilty account) xx
accounting for cancelled checks
• checks are cancelled when they become stale, violated or spoiled. a
check is considered stale if it has been outstanding for over 6 months
from its date. Replacement checks may be issued for cancelled checks
that were already released to the payees, upom submission of the
cancelled cheks to the accounting unit.
petty cash funds
• PCF refers to the amount granted to duly designated petty cash fund
custodian for payment of authorized petty or miscellaneous expensed
which cannot be convinently paid through checks or ADA.
dishonored checks
• a dishonored checks is a check that is not accepted when presented
fro payment, e.g., a check returned by the bank because of lack of
sufficient funds - 'bounced' check.
the drawer of the dishonored check is liable for the amount of the check and all penalties
resulting from the dishonor, without prejudice to his criminal liabilty for a 'bounced' check.
bank reconciliation
• a bank reconciliation statement is a report that is prepared for the
purpose of bringing the balances of cash (a) per records and (b) per
bank statemnt.
• a bank statement is a report issued by a bank which shows the credits and
debits to the depositor's account during a period, as well as the account's
cummulative balance.
cash equivalents
• cash equivalents - are short term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to an insignifcant risk of changes in value.
• only the debt isntrument acquired within 3 months before their scheduled
maturity date can qualify as cash equivalents.
receivables
• receivables represent claims for cash or other assets from other
entities. examples:
a) accounts receivable - refers to amounts due from customers arising from
regular trade and business transactions.
b) notes receivable - represents claims, ussually with interest, for which a
formal instrument of credit is issued as evidence of debt, such as promssory
notes.
c) loans receivable - used in BTr-NG books to recogbize loans extended by the
National Government to Government financial institutions 'GFIs' or GOCCs,
covered by loans and agreements.
d) other receivables, such as, interest receivable, due from employees/officers
other NGAs, lease receibles, dividens receivable, and the like.
receivables are initially measured at fair value plus transaction cost and subsequently measured
at amortized cost.
Investments
• financial asset at fair value through surplus or dificit is one that is
either:
a) held-for-trading, or
b) designated as at fair value through surplus or dificit on initial recognition.
any financial asset can be classeified in this category if its fair value can be
reliably measured.
• hel-to-maturity ivestments - are non-derivative financial assets with
fixed or determinable payments and fixed maturity that an entity has
the positive intention and ability to hold until maturity.
• loans and receivables - are non-derivative financial assets with fixed
or determinable payments and are not qouted in an active market,
Investments
• available for sale financial assets- are non-derivative financial assets
that are designated as available for sale or are not classifiable under
the other categories.
• investments in unqouted equity indtruments whose fair value cannot be reliably
measured are measured at cost.
impairment of financial assets
• an entity shall asess at the end of each reporting period whether
there is any objective evidence that a financial asset or group of
financial asset is impaired. If any such evidence exists, the entity shall
measure the amount of loss as the difference between the carrying
amount of the asset and the present value of estimated future cash
flows discounted at the financial asset's original effective interest
rate.
derecognition of financial asset
• derecognition is the process of removing a previously recognized
asset, liability or equity from the statement of financial position.
• a financial asset is derecognized when:
a) the contractual rights to the cash flows from the financial asset expire or are
waived; or
b) the financial asset is transferred and the transfer qualifies for derecognition,
such as when the risk and rewards of ownership and control of the financial
asset are relinquished.
derivatives
• a derivative is a financial instrument or other contract that derives its
value from the changes in value of some other underlying asset or
other instrument.
characteristics of a derivative
a) its value changes in response to the change in an underlying
b) it requires no initial net investment (or only minimal initial net
investment); and
c) It is settled at a future date.

an “underlying” is a specified price, or other variable or comodity price, foreign

exchange, including a schedule event that may or may not occur.
purpose of derivative
• the very purpose of derivative is risk management. risk management
is the process of identifying the desired level of risk, identifying the
actual risk and altering the latter to equal the former.
hedging
• heging is a method of offsetting a potential financial loss or the
structuring of a transaction to reduce risk involving fiancial
instruments.
• hedge accounting recognizes the offsetting effects on surplus or deficit of
changes in the fair values of the hedging instrument and the hedged item.