FINANCIAL ASSETS

CHAPTER 6

PRESENTED BY CLAIRE T. DELVO

WHAT IS FINANCIAL ASSETS?
 Known also as financial instrument.
 PAS 32, defines a financial instrument as any contract that gives rise to a
financial asset of one entity and a financial liability or an equity
instrument of another entity.
 A financial asset is any asset that is :
a. Cash
b. A contractual right to receive cash or another financial asset from another
entity.
c. A contractual right to exchange financial instrument with another entity under
conditions that are potentially favorable.
d. An equity instrument of another entity.
e. A contract that may or will be settled in the entity’s own equity instruments.
INITIAL RECOGNITION
 Financial assets are initially measured at fair value plus transaction costs.
But if the financial asset is held for trading or financial assets is measured at fair
value through profit and loss, costs are expensed outright.
 As a rule, transaction costs that are directly attributable to the acquisition of the
financial asset shall be capitalized as a cost of the financial asset.
 Transaction costs > incremental costs that are directly attributable to the
acquisition, issue or disposed the financial instrument.
 Examples of transaction cost :
a. Fees and commission
b. Brokers
c. Levies by regulatory agencies and securities exchanges
d. Transfer tax and duties.
FINANCIAL ASSETS –
CASH
Comprises of cash on hand, cash in bank, and cash treasury accounts.
 Adjustment for unreleased commercial checks
Unreleased checks are checks drawn but not given to the payees at the end of
period. Unreleased checks are reverted back to cash as follows :
Cash in Bank, Local Currency – Current xx
Accounts Payable(or other liability account) xx
• Unreleased checks are not physically cancelled.
• This procedure does not apply to the MDS account because there is no actual
cash with the Government Servicing Bank.
• Any unused NCA is reverted back to the National Government and therefore the
MDS account is zeroed out at the end of each period.
 Accounting for cancelled checks
• Checks are cancelled when they become stale, voided or spoiled.
• Considered stale if it has been outstanding for over 6 months from its date.
• Cancelled checks are reverted back to cash as follows :
CURRENT YEAR : To record the cancellation of stale/voided/spoiled MDS checks
Cash – MDS XXX
Accounts Payable XXX
PRIOR PERIOD : To recognized the cancellation of stale/voided/spoiled/ MDS
checks in prior period
Accumulated Surplus/(Deficit) XXX
Accounts Payable XXX
 Petty cash fund refers to money set aside to pay small expenses which cannot
be conveniently paid through check or ADA.
• There are no entries made as disbursements are made out of the PCF. Journal
entries will be made when PCF is replenished or adjusted at the end of period
for unreplenished expenses.
• Payment of expenses out of the fund > cashier generally requires a signed
petty cash voucher for such payments and simply prepares memorandum
entries in the petty cash journal.
• Whenever the petty cash fund is low, a check is drawn to replenished the fund.
• The disbursing officer is liable for any cash shortage while any cash overage
that he cannot satisfactorily explain to the auditor is forfeited in favor of the
government.
DISHONORED CHECKS
 Dishonored checks is a check that is not accepted when presented for payment.
Example : a check is returned by the bank because of lack of sufficient funds
(bounced check)

 The drawer of the dishonored check is liable for the amount of check and
penalties resulting from the dishonor without prejudice to his criminal liability for a
‘bounce check’.
 Guidelines :
1) When a check is dishonored, the Collecting Officer shall:
a) Issue a Notice of Dishonored Checks to the drawer and any endorser
b) Cancel the related OR.

2) If the C.O fails to issue the notice, the D.C becomes his personal liability. The
drawer and any endorser not given the notice will be relieved from any liability.

3) Refused by bank when presented within 90 days from its date is a prima facie
evidence.

4) A dishonored check shall be settled by payment in cash or certified check. The

D.C shall not be returned to the payor unless he returns first the previous OR
therefor.
BANK RECONCILIATION
1. A statement prepared for the purpose bringing the cash balance per book
and cash balance per bank.
2. The Chief Accountant or designated staff shall prepare separate bank
reconciliations for each account maintained by the entity within 10 days
from receipt of the monthly bank statement.
3. The B.R statements shall be prepared in 4 copies to be submitted
within 20 days from the receipt of the bank statement to : COA Auditor,
Head of Agency, Accounting Division, and Bank if necessary.

CASH EQUIVALENTS
4. Short term, highly liquid investments that are readily convertible to cash.
5. Only debt instruments acquired within 3 months before their
scheduled maturity date can qualify as cash equivalents.
RECEIVEABLES
1. AR – amounts due from customer
2. NR – represent claims with interest which a formal instrument of credit is
issued as the evidence of debt.
3. Loans Recievable – used in a BTr-NG books to recognize loans extended by the
NG.
4. Initially measured at fair value plus transaction costs and subsequently
measured at amortized cost.
CATEGORIES OF FINANCIAL
ASSETS
1) Financial asset at fair value through surplus or deficit is one that is either :
a) Held for trading
b) Designated at fair value through surplus or deficit on initial recognition. Any
financial asset can be classified in this category if its fair value can be
reliably measured.

2) Held to maturity investments.

3) Loans and receivables.

4) Available for sale financial assets.

DERECOGNITION OF FINANCIAL
ASSETS
 The contractual rights to the cash flows from the financial asset expire or are
waived.

 The financial asset is transferred and the transfer qualifies for derecognition,
such as when the risks 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 charges in value of some other underlying asset or other underlying
asset or other instrument.

 Purpose of derivatives is risk management. Risk management is the process of

identifying the desired level of risk, identifying the actual level of risk and
altering the latter to equal the former.

 Characteristics of a derivative :
a) Its value changes in response to the change in an underlying.
b) It requires no initial investment
c) It is settled at a future date.
HEDGING
 Hedging is a method of offsetting a potential financial loss or the
structuring of a transaction to reduce risk involving financial intruments.

 Components of a Hedging Instrument

a) Hedging instrument
b) Hedged item

 Hedging Relationships
a) Fair Value hedge
b) Cash Flow hedge
c) Hedge of a net investment in a foreign operation