Financial Assets

Learning
Objectives

1. Define financial assets

and give examples
2. Account for cash and
cash equivalents
3. Account for receivables
4. Account for investments
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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.

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Financial asset is any asset that is:
▪ Cash
▪ An equity instrument of another entity
▪ A contractual right to receive cash or another financial
asset from another entity
▪ A contractual right to exchange financial instruments
with another entity under conditions that are
potentially favorable; or
▪ A contract that ill or may be settled in the entity’s
own equity instruments.
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Financial liability is any liability that is:
▪ A contractual obligation to deliver cash
or another financial asset to another entity;
▪ A contractual obligation to exchange financial assets
or financial liabilities with another entity under
conditions that are potentially unfavorable to the
entity; or
▪ A contract that will or may be settled in the entity’s
own equity instruments.

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Equity instrument is any contract
that evidences a residual interest
in the assets of an entity after
deducting all of its liabilities

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 INITIAL RECOGNITION

A financial asset is recognized when an entity becomes

party to the contractual provisions of the instrument.

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 INITIAL MEASUREMENT

▪ Initially measured at fair value plus transaction costs,

except for financial assets at fair value through
surplus or deficit whose transaction costs are
expensed.
▪ Transaction costs are incremental costs that are
directly attributable to the acquisition, issue, or
disposal of a financial instrument.

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Categories of
Financial Assets

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 Type of Financial Examples Initial Measurement Subsequent
Asset Measurement
A. Financial asset at Investment in quoted Fair value Fair value, changes in
fair value through stocks or bonds fair value are
surplus or deficit recognized in
surplus/deficit
B. Held-to-maturity Investments in bonds Fair value plus Amortized cost (using
and other debt transaction costs the effective interest
securities to be held method)
until maturity
C. Loans and Accounts, notes, Fair value plus Amortized cost (using
receivables loans receivables transaction costs the effective interest
method)
D. Available-for-sale Investments in stocks Fair value plus Fair value, changes in
financial assets or bonds not classified transaction costs fairvalue are
under (a) to (c) recognized in equity
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 Illustration: Initial Measurement

Entity A acquired an investment for P100,000.

Transaction costs amount to P10,000.
Case 1: The investment is classified as Financial Asset
Held for Trading:

Financial Asset Held for Trading 100,000

Other Financial Charges 10,000
Cash in Bank-Local Currency, Bangko
Sentral ang Pilipinas 110,000
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 Illustration

Entity A acquired an investment for P100,000.

Transaction costs amount to P10,000.
Case 2: The investment is classified as Held-to-Maturity
investment

Investment in Treasury Bills-Local 110,000

Cash in Bank-Local Currency, Bangko
Sentral ang Pilipinas 110,000

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 Illustration

Entity A acquired an investment for P100,000.

Transaction costs amount to P10,000.
Case 3: The investment is classified as Available for Sale
Assets

Investment in Stocks (or Bonds) 110,000

Cash in Bank-Local Currency, Bangko
Sentral ang Pilipinas 110,000

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 Illustration 2: Subsequent Measurement

Assume the investment in Illustration 1 is investment in

stocks. The fair value at the end of period is P120,000.
Case 1: The investment is classified as Financial Asset
Held for Trading

Financial Assets Held for Trading 20,000

Gain from Changes in Fair Value of
Financial Instruments (120k-100k) 20,000

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 Illustration 2: Subsequent Measurement

Assume the investment in Illustration 1 is investment in

stocks. The fair value at the end of period is P120,000.
Case 2: The investment is classified as Available-for-
sale financial assets

Investment in Stocks 10,000

Unrealized Gain/(Loss) from Changes in
Fair Value of Financial Assets (10k-110k) 10,000

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 Illustration 3: Held-to-maturity investments

On January 1, 20x1, Entity A acquires 5-year, 5%,

P1,000,000 face amount bonds for P957,876 and
classifies them as held-to-maturity investments. The
issuer pays annual interests every December 31. The
effective interest rate is 6%
Investment in Bonds 957,876
Cash in Bank-Local Currency, Bangko
Sentral ng Pilipinas 957,876
To recognize the investment in bonds

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Cash and Cash
Equivalents

Cash comprises cash on hand, cash in

bank and cash treasury accounts.

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 Adjustments for Unreleased Commercial
Checks

▪ Unreleased 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 liability account) xx

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 Accounting for Cancelled Checks

▪ Checks are cancelled when they become stale,

voided or spoiled. Cancelled checks are reverted back
to cash as follows:

The canceled check pertains to

Current year Prior Period
Cash-Modified Disbursement Accumulated Surplus/(Deficit) xx
System (MDS),Regular xx Accounts Payable xx
Accounts Payable xx To recognize the cancellation of
To recognize the cancellation of stale/voided/spoiled MDS checks in prior
stale/voided/spoiled MDS Checks year 19
 Petty Cash Fund

▪ Refers to the amount granted to duly designated

Petty Cash Fund Custodian for payment of
authorized petty or miscellaneous expenses which
cannot be conveniently paid through checks or ADA.

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 Guidelines for Petty Cash Fund

1. The Head of Agency shall approve the amount of PCF to

be established, which shall be sufficient to defray
recurring petty expenses for 1 month.
2. The PCF Custodian shall be properly bonded whenever the
established amount of PCF exceeds P5,000
3. The PCF shall be maintained using the Imprest System. At
all times, total cash on hand and unreplenished expenses
shall be equal to the PCF ledger valance.

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 Guidelines on Petty Cash Fund

4. The PCF shall be kept separately from other advances or

collections and shall not be used to pay for regular
expenses such as rentals, electricity, water and the like.
5. PCF payments shall not exceed P15,00 for each
transaction, except when otherwise authorized by law or
by the COA. Splitting of transactions to avoid exceeding
the ceiling is prohibited.
6. A canvass from at least 3 suppliers is required for
purchases amounting to P1,000 and above, except for
purchases made while on official travel. 22
 Guidelines on Petty Cash Fund
7. PCF disbursements shall be supported by properly accomplished
and approved Petty Cash Vouchers, invoices, ORs, or other
evidence of disbursements
8. Replenishment shall be made as soon as disbursement reach at
least 75% or as needed.
9. At the end of the year, the PCF Custodian shall submit all
unreplenished Petty Cash Vouchers to the Accounting Unit for
recording in the books of accounts.
10. The unused balance of the PCF shall not be closed at year-end. It
shall be closed only upon the termination, separation, retirement
or dismissal of the PCF Custodian, who in turn shall refund any
balance to closer his/her cash accountability 23
 Illustration

After careful estimates of recurring monthly petty cash

expenses, the Head of Entity A approves the establishment of
a P50,000 petty cash fund.

Date Petty Cash 50,000

Cash-Modified Disbursement System
(MDS), Regular 50,000
To record the establishment of PCF

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A cash of the PCF reveals the following:

Coins and Currencies 12,500

Vouchers:
Office Supplies Expenses 10,000
Fuel, oil, and Lubricants 15,000
Postage and Courier Expenses 8,000
Other MOOE 4,500 37,500
Total per count 50,000
Accountability 50,000
Shortage (Overage) -__ 25
Case 1: The PCF is replenished.
Date Office Supplies Expenses 10,000
Fuel, Oil and Lubricant 15,000
Postage and Courier Expenses 8,000
Other MOOE 4,500
Cash –Modified Disbursement System
(MDS), Regular 37,500
To record the replenishment of the PCF
Case 2: The PCF is not replenished.

Date Office Supplies Expenses 10,000

Fuel, Oil and Lubricant 15,000
Postage and Courier Expenses 8,000
Other MOOE 4,500
Petty Cash 37,500
To adjust the PCF for unreplenished
disbursements
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Case 3: The PCF Custodian retires and the PCF is closed
Date Cash – Collecting Officer 12,500
Petty Cash 12,500
To record the return of unused PCF upon
retirement o the Petty Cash Custodian

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 Accounting for Cash Shortage/Overage of
Disbursing Officer

The disbursing officer is liable for any cash shortage

while any cash overage that cannot be satisfactory
explain to the auditor is forfeited in favor of the
government.

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Cash Shortage
Due to Officers and Employees xx
Advances for/to...(appropriate account) xx
To recognize cash shortage of disbursing officer
Cash-Collecting Officers xx
Due from Officers and Employees xx
To recognize restitution of cash shortage
Cash-Treasury/ Agency Deposit, Regular xx
Cash-Collecting Officers xx
To recognize the remittance of restituted cash
shortage to the BTr

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Cash Overage
Cash-Collecting Officers xx
Cash-Collecting Officers xx
To recognize forfeiture of cash overage of the
disbursing officer
Cash-Treasury/Agency Deposit, Regular xx
Cash-Collecting Officers xx
To recognize the remittance of forfeited cash
overage to the BTr

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 Dishonored Checks

Dishonored check- check that is not accepted when

presented for payment

▪ 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
liability for a “bounced” check.

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 Guidelines in Dishonored Checks

a. When a check is dishonored, the Collecting Officer

shall:
i. Issue a Notice of Dishonored Checks to the
drawer and any endorser; and
ii. Cancel the related OR
b. If the Collecting Officer fails to issue the notice, the
dishonored checks becomes his personal liability.
The drawer and any endorser not given the notice
will be relieved from any liability. 32
 Guidelines in Dishonored Checks

c. A check refused by the drawee bank when

presented within 90 days from its date is prima
facie that the drawer has knowledge about the
insufficiency of his funds, unless the drawer pays
the check in full or makes arrangement with the
drawee bank the full payment of the check within 5
banking days after receiving the notice of dishonor.

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 Guidelines in Dishonored Checks

d. A dishonored check shall be settled by payment in

cash or certified check. The dishonored check shall
not be returned to the payor unless he returns first
the previous OR thereof.

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 Journal Entries

Dishonored check are recorded to the “Other

receivables” account as follows:
➢ Collections remitted to BTr
Current Year Prior Year

Other Receivables xx Other Receivables xx

Cash-Treasury/Agency Accumulated Surplus/(Deficit) xx
Deposit, Regular xx To recognize the cancellation of
To recognize the cancellation of prior year’s deposited collections due to
current year’s deposited collections due to dishonored checks.
dishonored checks
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 Journal Entries

➢ Collections remitted to Authorized Government

Depository banks

Current Year Prior Year

Other Receivables xx Other Receivables xx

Cash in Bank-Local Cash in Bank-Local
Currency, Current Account xx Currency, Current Account xx

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 Guidelines for Bank Reconciliation

1. Bank reconciliation shall be prepared as internal

control to ensure the correctness of cash records
and as deterrent to fraud.
2. The Chief Accountant or designated staff shall
prepare separate bank reconciliations for each bank
account maintained by the entity within 10 days
from receipt of the monthly bank statement

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 Guidelines for Bank Reconciliation

3. The Adjusted Balance Method shall be used. Under

this method, the unadjusted book and bank
balances are brought to an adjusted balance that is
reported on the statement of Financial Position
4. Bank reconciliation shall be prepared in 4 copies to
be submitted within 20 days from receipt of bank
statement to the following: COA Auditor, Head of
Agency, Accounting Division, and Bank, if necessary
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 Guidelines for Bank Reconciliation

5. A Journal Entry Voucher (JEV) shall be prepared to

record any reconciling item.

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 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
insignificant risk of changes in value
▪ Only debt instruments acquired within 3 months
before their scheduled maturity date can qualify as
cash equivalents.

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Receivables

Represent claims for cash or other assets

from other entities

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Derivatives

A financial instrument or other contract that

derives its value from the changes in value
of some other underlying assets or other
instruments
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Derecognition of
Financial Assets

The process of removing a previously

recognized asset, liability or equity from the
statement of financial position.

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