Fund and Other Investments

By: Dr. Angeles A. De Guzman

Dean, College of Business Education
 Definition of Fund
• Cash and other assets set aside for a specific purpose either
by reason of the action of management or by virtue of a
contract or legal requirement
• Fund may be in the form of cash, securities and other assets
• Funds for current purposes include petty cash fund, payroll
fund, interest fund, dividend fund, and tax fund and
classified as current assets
• Funds for noncurrent purposes include sinking fund,
preference share redemption fund, replacement fund, plant
expansion fund, contingency fund and insurance fund and
classified as noncurrent investment
 Measurement of Fund
• Long term fund shall be carried at the amount
of cash plus the cost of securities adjusted for
discount or premium amortization, and other
assets in the fund
 Sinking Fund
• Sinking fund or redemption fund is a fund set aside for the
liquidation of long-term debt, more particularly long-term bonds
payable
• The accounting for sinking fund depends on whether the fund is
under the administration of the entity or under the charge of a
trustee
• When the fund is under the administration of the entity, the entity
records the fund transactions currently and thus makes a distinction
whether the fund is in the form of cash, securities and other assets.
• If the fund is under the administration of a trustee, fund
transactions are not currently recorded by the entity. The account
“sinking fund-trustee” is used.
 Sinking Fund Contribution
• The amount of periodic contribution to the
sinking fund may be voluntary or mandatory.
• It is voluntary if the sinking fund contribution
is the result of a discretionary action of
management.
• It is mandatory if the sinking fund contribution
is required by contract, usually with
bondholders
 Classification of Sinking Fund
• As a rule sinking fund is classified as
noncurrent asset
• However, if bond payable for which the sinking
fund was set aside becomes due within twelve
months after the end of reporting period, the
sinking fund is reclassified as current asset
• The classification of a fund shall parallel the
classification of the related liability
Preference share Redemption Fund
• The terms of the preference share issue may
provide that preference share may be called in
for redemption by the issuing entity
• The issuing entity may set up a fund to insure
the eventual redemption of the preference
share
 Fund for Acquisition of Property
• The future acquisition of property, plant, and equipment
may involve the setting aside of a certain amount of cash
• Such fund may be called “replacement fund” or “plant
expansion fund”
• A replacement funs is a cash set aside in anticipation of
future replacement of depreciable asset
• On the other hand, a plant expansion fund is cash set
aside in anticipation of future acquisition of additional
property because of expanded or increased volume of
operations
 Contingency Fund
• A contingency fund is cash set aside for the
purpose of meeting obligations that may arise
from contingencies like pending lawsuits or
taxes in dispute
 Insurance Fund
• An insurance fund is cash set aside for the purpose of
meeting obligations that may arise from certain risks
not insured against, such as fire, typhoon, explosion
and other similar casualties.
• The establishment of an insurance fund is the result of
a policy of self-insurance which is actually a policy of
“no insurance”
• An entity may decide to self-insure on the philosophy
that in the long run the cost of self-insurance would
be less than the cost of purchased insurance.
 Cash surrender value
• The entity may insure the life of its officers and
name itself as beneficiary
• The purpose of this arrangement is to compensate
the entity for the loss of services arising from the
untimely death of important members of
management.
• The accounting for the payment of the insurance
premiums will depend on whether the beneficiary
is the entity itself or the officer insured
 Cash Surrender Value
• If the beneficiary is the officer insured or any person
other than the entity like the wife of the officer, no
accounting problem is encountered because the
payment of the premium is simply, charged to
insurance expense
• An accounting problem will arise when the
beneficiary is the entity itself.
• Cash surrender value is the amount which the
insurance firm will pay upon the surrender and
cancellation of the life insurance policy
 Cash surrender value
• Cash surrender value arises if the following
requisites are present:
– The policy is a life policy. There is no cash surrender
value in fire, accident and other nonlife policies
– Premiums for three full years must have been paid
– The policy is surrendered at the end of the thrid
year or anytime thereafter.
• The cash surrender value is classified as
noncurrent investment
Theory on the cash surrender value
• The cash surrender value of a life policy arises from
the fact that the fixed annual premium is much in
excess of the annual risk during the earlier years of
the policy
• The excess is necessary in order to balance the
deficiency of the same premium to meet the annual
risk during the later years of the policy
• Such excess in the premium paid over the annual
cost of insurance, with accumulated interest,
constitutes the cash surrender value