International Financial Reporting

Standards (IFRS)
&
International Accounting Standard (IAS)
Cash and Cash Equivalents
(IAS-7 & IAS-39/IFRS-9)
Trade & Other Receivables
(IAS-18/IFRS-15, IAS-32 & IAS-39/IFRS-9)

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 Outline

 Overview of Financial Instruments

 Cash and Cash Equivalents
 Trade and other Receivables

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 Overview of Financial Instruments
 Types of Assets

Physical
Assets
Assets
Financial
Assets

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 Overview of Financial Instruments (Continued)
Definition of Financial Instrument
 Any contract that gives rise to both a Financial Asset of
one entity and a Financial Liability or Equity Instrument
of another entity.
Financial
Assets
Financial
Liabilities
Financial Instruments
Equity
Instrument

Derivatives

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 Financial Assets
Definition (IAS -39 / IFRS -9)
Financial Asset is any asset that is:
• a contractual right to receive cash or another financial asset,
• a contractual right to exchange financial assets or liabilities
with another entity on potentially favorable terms.
 Examples of Financial Assets:
 Cash
 Trade Receivables
 Investments in debt securities
 Investment in shares
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 CASH &
CASH EQUIVALENTS

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 Applicable Standards
 Accounting for Cash and Cash Equivalents is
mainly governed by:
 IAS 7 - Statement of Cash Flows
 IAS 39 - Financial Instruments:
Recognition and Measurement, &
 IFRS 9 - Financial Instruments:
Classification, Recognition, Measurement,
Impairment, and Hedging.

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 Basic Concepts & Terminologies

Cash:
 Comprises of cash on hand & on demand
deposits!
 Held in the form of currencies & notes!
 Notes & Coins comprising foreign currency!
 Bank overdraft if payable on demand (for
the lender)!

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 Basic Concepts & Terminologies (Continued)
 Cash Equivalents:
 Are short-term, highly liquid investments!
 Are readily convertible to known amounts of
cash!
 Are subject to an insignificant risk of changes in
value!
 Are non-physical cash instruments which can
be converted to physical cash within a period of
90 days with little or no transaction costs!

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 Scope & Exclusions of Cash & Cash Equivalents
 Exclusions
 Cash & Cash Equivalents do not include the ff:
 Cash Advances with respect to entities
neither fully nor proportionally
consolidated in the group FS!
 Equity Investments unless they are, in
substance cash equivalents such as a PS

with specified short redemption date!

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 Review questions
 Cash & Cash Equivalents include;

a. Cash held in the form of currencies & notes.

b. Demand deposit.
c. Equity Investments which allow residual
interest in the assets of an entity.
d. Bank overdraft.
e. Cash on hand.

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 Measurement
 Cash is carried at its face value
which is equivalent to fair value!
 Cash and cash equivalents in
Foreign Currencies are:
 Translated at the exchange rate of
the date of the operation!

 Converted to reporting currency on

the reporting date at closing rates!
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 Presentation
 Distinguish cash available for general
operations from restricted cash!
 Classification of Cash or Cash Equivalent
Asset :
1. Current Asset;
 When it is not restricted from being
exchanged or used to settle a liability for at
least 12 months from the B/S date!
2. Non-Current Asset;
 Restricted cash
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 Presentation (cont’d)
 Examples of Restricted Cash:
 Cash & cash equivalents held by a Group
Subsidiary that operates in a country where
there are exchange controls or legal
constraints.

 Sinking Fund.

 Proceeds of a Construction Mortgage

 Funds allocated for Special Purposes by

action of the company’s board of directors.
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 Exercise
 Identify whether each of the ff cash is
restricted or not:
 Checking account held for General
Payments
 Payroll Fund
 Sinking Fund
 Petty Cash Fund
 Purchase Fund
 Mortgage Fund
 Change Fund
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 Presentation (Cont’d)

Offsetting of Cash Accounts:

 Offset bank overdrafts against cash
account provided that overdraft is
payable on demand!

 Cash debit and credit accounts with the

same financial entity shall not be
reported net (offset), unless as a result of
contractual agreements!
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 Presentation (Cont’d)
 Offsetting of Cash Accounts: (Continued)
e.g. Assume that ABC Company has two
checking accounts with CBE (Arada and
6-kilo branches). The account with
Arada branch shows a debit balance of
ETB 50,000 and that of 6-kilo branch
shows a credit balance of ETB 60,000.
 How does ABC Co. report these
balances in the balance sheet?
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 Review Questions

1) How do we measure cash?

2) Cash and cash equivalents in foreign
currencies are initially translated at the
exchange rate of the closing date
(true/false)
3) As per International Financial Reporting
Standards, offsetting cash accounts is
strictly forbidden. (true/false)

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 Reporting
What to report?
 Movements of cash & cash equivalents during the
period & disclosing the category they belong such as:
- Cash at bank
- Cash on hand
- Short-term deposits
 Reconciliation of the cash & cash equivalents in the
statement of Cash Flow to the statement of Financial
Position.
 Amount of cash subject to restrictions as at the end
of the reporting period.
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Similarities and Difference between IFRS & GAAP
in relation to Cash & Cash Equivalents
 SIMILARITY
 According to both standards, cash includes cash
on hand & demand deposits.
 IAS 7 define Cash Equivalents as;
 Short-term highly liquid investments that are
readily convertible to known amounts of cash
which mature within 90 days & are subject to
insignificant risks.
↑ The definition under US GAAP is similar!
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 Similarities and Difference b/n IFRS & GAAP (Continued)

 DIFFERENCE
 GAAP does not allow offsetting bank
overdrafts against the cash account,
but IFRS does!
 IFRS includes bank overdrafts in the
cash & cash equivalents category if
they are repayable on demand!
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TRADE & OTHER RECEIVABLES

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 Applicable Standards

 IAS 18 / IFRS 15 – Revenues,

 IAS 32 – Financial Instruments
– Presentation & Disclosures,
 IAS 39/IFRS 9 – Financial
Instruments –Classification,
Recognition & Measurement

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 What is Receivable?
Receivables
Are asset designations/terms
applicable to all debts,
unsettled transactions
or other monetary obligations
owed to a company
by its debtors or customers!
 Form part of Financial Assets under the
category of “Loans & Receivables”
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 What is Receivable? (Continued)

 Loans and Receivables are:

 Non-derivate financial asset with
fixed or determinable payments;
 that are not quoted in an
active market!
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 Classification of Receivables
 Receivables could be classified in to:
Receivables

Trade

Non-trade

Receivables
Originated by the
Entity

Acquired/ purchased

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 Scope and Exclusions
 Trade & Other Receivables include the ff:
 Bills receivables;
 Products delivered, but not yet billed;
 Staff advances and prepayments;
 Government Receivables (VAT & other taxes
and dues relating to operations)
 Receivables from Operating Subsidies &
Associate Undertakings;
 Other A/R (including accrued income).
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 Scope and Exclusions (Continued)
 Deductions from Trade & other
Receivables:
 Advances & prepayments
received from customers;
 Rebates (refunds);
 Discounts;
 A/P on packaging, containers
& materials on which
deposits are charged!
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 Recognition

A Trade Receivable arises

upon fulfillment of the
conditions required for
Revenue Recognition of a sale
of goods and services!
(IAS 18 & IFRS 15)

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 Measurement
 The measurement rules to be applied depend on the
classification of the receivable as:
 Held to collect contractual C/F or
Business Model
 Held for trading (HFT)

 Held for Trading: receivables owned principally for

the purpose of Selling or Repurchasing in near
terms.
 Held to collect contractual cash flows: Receivables
are held to collect cash from debtors periodically
and/or on their maturity date.
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 Measurement (cont’d)

 Measurement Methods (IFRS 9)

1. Amortized Cost
2. Fair Value through Profit or Loss

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 Measurement (cont’d)
 Measurement Methods:
1. Amortized Cost
 As per IFRS 9, a Financial Asset shall be measured at
Amortized Cost if both of the ff conditions are met:
 The asset is held within a business model whose
objective is to hold assets in order to collect
Contractual Cash Flows!
 The contractual terms of the FAs give rise on
specified dates to cash flow that are solely
payments of Principal & Interest!
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 Measurement (cont’d)
Measurement Methods:
2. Fair value
 FAs which do not fulfill both of the above
conditions (or, those held for trading) are
valued at fair value i.e.,
 a Financial asset is measured at fair
value unless it is measured at
amortized cost!
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 Measurement (cont’d)
Example : Identify whether each of the following
cases require the classification of receivables as:
 Held for Trading, or
 Held to Collect Contractual Cash Flows:

A. An entity holds loans and advances to customers

to collect their contractual cash flows but would
sell an investment in particular circumstances,
perhaps to fund unforeseen cash shortage.

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 Measurement (cont’d)
Example (Continued)

(Held for Trading, or Held to Collect Contractual Cash Flows) ?

B) ABC Co. has a business model with
the objective of buying and reselling
loans and advances from various financial
institutions such as microfinance
institutions.

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 Measurement (cont’d)
Measurement Timing
Initial
Measurement
Non
Discounted Value
Discounted
Value

Subsequent Measurement
Amortized
Cost

Fair
Value

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 Measurement (cont’d)
1. Initial Measurement:
 For both receivables “held to collect contractual cash
flows” & “held for trading”:
 When a receivable is recognized initially, the company
shall measure it at its cost, including required taxes!
1.1. When the effect of the passage of time is not
significant, receivables are measured on an
Un-discounted Basis!
1.2. When the effect of the passage of time is
significant, receivables are initially measured on
a Discounted Basis!
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 Measurement (cont’d)
2. Subsequent Measurement
2.1. Receivables held to collect Contractual CF
Measured at amortized costs using effective interest rate;
A. If initially recognized at Un-discounted Base =
Nominal Value – Impairment/Un-collectability
B. If initially measured at Discounted Value =
Carrying Amount + Effective Annual Interest – Interest Collection
– Impairments /Un-collectability
2.2. Receivables Held for Trading
Measured at Fair Value!
 Change in FV reported in P&L!
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 Amortized cost illustrated
A company gives a loan to its customer as per the
following terms:
 Loan Amount: 100,000
 Maturity: 5 years
 Interest: 1st year – 6%, 2nd year – 8%, 3rd year – 10%,
4th year – 12% and 5th year 18%
 The loan repayments are interest only each year and
principal repayment at maturity.

Required: Compute amortized cost amount to be reported

in the balance sheet at the end of each year.

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 Amortized cost illustrated (cont’d)

Solution
 The effective interest rate (IRR) is calculated as the
rate that exactly discounts estimated future cash
flows through the expected life of the instrument.
100,000 = 6000/(1+IRR)1+ 8000/(1+IRR)2
+10000/(1+IRR)3 + 12000/(1+IRR)4 +
(18000+100000)/(1+IRR)5
 Solving this equation on excel we get an
IRR = 10.2626%

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 Amortized cost illustrated (cont’d)
 The amortized cost of the loan receivable at the end
of each period will be accounted as follows:
YEAR AMORTISED COST EIR CASH AMORTISED COST
AT THE START OF (B) = (A) * FLOW AT THE END OF
THE YEAR 10.2626% (C) THE YEAR
(A) (D) = (A)+ (B) – (C)

1 100,000 10,263 6,000 104,263

2 104,263 10,700 8,000 106,963

3 106,963 10,977 10,000 107,940

4 107,940 11,077 12,000 107,017

5 107,017 10,983 118,000 0

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Example: On 1st February 2015, ABC Bank provided working
capital loan amounting Br 2m to its customers (borrowers) in
anticipation that the bank will collect the loan after one year (31
January 2016). The fiscal year ends on June 30. Assume none of
this loan was repaid by 30 June 2016. There is no collateral for
the loan, except good credit history. Assume also that, the
industry practice shows a recognition of 20% un-collectability for
such past due loans.
a) Identify whether this loan is accounted for using amortized cost
or fair value.
b) What was the value at which the loan should be recorded on 1 st
of February 2015?
c) What was the value at which the loan should be reported on 30
June 2015 assuming that there was no impairments during 2015.
d) At what value should the loan receivable recorded as of 30 June
2016?
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 Measurement (cont’d)
 Answer
a) Identify whether this loan is accounted for using
amortized cost or fair value.
 Amortized cost, because it is held to collect
contractual CF by ABC
b) What was the value at which the loan receivable should
be recorded on 1st of February 2015?
 ETB 2m
c) What was the value at which the loan should be
reported on 30 June 2015 assuming that there was no
impairments during 2015.
ETB 2m
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 Measurement (cont’d)
d) At what value should the loan receivable recorded
as of 30 June 2016?

Loan Loss Provision = 2,000,000 * 20% = 400,000

Net Loan Receivable=2,000,000–400,000 = 1,600,000

 The entry to record the provision would be:

Bad Debt Expense ………. 400,000
Provision for Doubtful Debts …. 400,000

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 Measurement (cont’d)
 Subsequent Measurement (Continued)
III) Receivables in Foreign Currencies
 Are translated at the exchange rate of the date of
the operation.
 Are restated at closing date using the closing date
exchange rate, and
 The resulting exchange d/c is included in the I/S,
in accordance with effects of changes in foreign
exchange rates!

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 Reporting and Disclosure
 Disclosures (IFRS 7)
 Movements in the balances of Account
Receivables!
 Allowances for doubtful accounts (Provisions)
& its movements during the year!
 Receivables which are pledged or otherwise
restricted at the end of the reporting period!
 Age analysis of receivables!
 Receivables that are transferred, if any!

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 GAAP Vs. IFRS
Similarities & Difference
Methods/ US IFRS
Treatments GAAP (IAS)

 The loans and Loans and

Loans receivables receivables
and category does is one of the
Receivab not exist FA
les under US categories in
GAAP. IFRS

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 GAAP Vs. IFRS (Concerning Receivables)
Similarities and Difference (Continued)
Methods/ US IFRS
Treatments GAAP (IAS)

Impairment Similar to IFRS, US Similar to US

GAAP requires GAAP, IFRS 9
of specifies that
entities to assess
Notes entities
whether FA are should assess
Receivables impaired & whether its FA
recognize the are impaired.
impairment.

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 GAAP Vs. IFRS (Concerning Receivables)
Similarities and Difference (Continued)
Methods/ IFRS & GAAP have similar requirements for
Treatments recording Uncollectible A.R

Collection of A/R previously

written off is accounted for
 Uncollecti similarly under US GAAP and IFRS.
ble
Accounts  The only d/c b/n the two
Receivable standards relates to terminology;
IFRS refers to the allowance
accounts as a ‘Provision.’

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 THE END

Thank You!!!

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