MODULE ACCOUNTING FOR GOVERNMENT AND NON-PROFIT ORGANIZATIONS

CHAPTER 6 FINANCIAL ASSETS

Learning Objectives

Define a financial asset and give

examples.
Account for cash and cash equivalents.
Account for receivables.
Account for investments.

Definitions

 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. (PPSAS
28.9)

 Financial asset – is any asset that is:

a. Cash;

b. An equity instrument of another entity;

c. A contractual right to receive cash or another financial asset from another

entity;

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d. A contractual right to exchange financial instruments with another entity

under conditions that are potentially favorable; or

e. A contract that will or may be settled in the entity’s own equity instruments.

Examples of Financial Assets

 Cash and Cash equivalents

 Receivables

 Investments in equity and debt securities

 Derivative assets

Initial Recognition

 A financial asset is recognized when an entity becomes a party to the contractual

provisions of the instrument. (PPSAS 29.16)

Initial Measurement

 Financial assets are 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.

Cash

 Cash – comprises cash on hand, cash in bank and cash treasury accounts.

Unreleased & Cancelled Checks

 Unreleased checks are reverted back to cash.

Cash in Bank, Local Currency-Current xx

Accounts Payable (or other liability account) xx

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 Cancelled checks (e.g., stale, voided or spoiled) are reverted back to cash.

The cancelled check pertains to:

Current year Prior period

Cash-Modified Disbursement Accumulated Surplus/

System (MDS), Regular xx (Deficit) xx

Accounts payable xx Accounts payable xx

Petty Cash Fund

 The Petty Cash Fund of a government entity is:

 Maintained using the imprest system.

 Sufficient to defray recurring petty expenses for 1 month.

 Used for disbursements not exceeding ₱15,000 per transaction.

 Replenished as soon as disbursements reach at least 75% or as needed.

Accounting for Cash Shortage/Overage

 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.

 Shortage:

Due from Officers and Employees xx

Advances for/to...(Appropriate account) xx

 Overage:

Due from Officers and Employees xx

Advances for/to...(Appropriate account) xx

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 Dishonored Checks

 A dishonored check is a check that is not accepted when presented for payment,
e.g., a check returned by the bank because of lack of sufficient funds - ‘bounced’
check.

 Dishonored checks are recorded in the “Other Receivables” account.

Bank Reconciliation

 A government entity prepares monthly bank reconciliations for each of the bank
accounts it maintains, using the adjusted balance method.

Cash Equivalents

 Only debt instruments acquired within 3 months before their scheduled

maturity date can qualify as cash equivalents.

Receivables

 Receivables are initially measured at fair value plus transaction costs and
subsequently measured at amortized cost.

Categories of Financial Assets

Type of Financial Examples Initial Measurement Subsequent

Asset Measurement

a. Financial Investments in Fair value Fair value; changes

asset at fair quoted stocks in FV are
value through or bonds. recognized in
surplus or surplus/deficit
deficit

b. Held-to- Investments in Fair value plus Amortized cost

maturity bonds and transaction costs
other debt
securities to be
held until

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maturity

c. Loans and Accounts, Fair value plus Amortized cost

receivables Notes, Loans transaction costs
receivable

d. Available-for- Investments in Fair value plus Fair value; changes

sale financial stocks or bonds transaction costs in FV are recognized
assets not classified in equity
under (a) to (c)
above.

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:

1. Its value changes in response to the change in an underlying;

2. It requires no initial net investment (or only a very minimal initial net
investment); and

3. It is settled at a future date.

Purpose of a derivative

 The very 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.

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To know more information about CHAPTER 6-FINANCIAL ASSETS- PLEASE CLICK

THE LINK: https://www.youtube.com/watch?v=Pn6LDJlsFzk

To know more information about CHAPTER 6-Receivables- PLEASE CLICK THE LINK:
https://www.youtube.com/watch?v=YMw_9naWXNI

Reference:

Accounting for Government and Non-profit Organization by Zeus Vernon B.

Millan

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