AEC 305

Accounting for Government

and Non-Government
Organization
Group 3

Calubiran, Malaga,
Karla Brayne Hanny
Elizalde,
Tumangday,
Maryanne Dale
Janen
Reporters
 CHAPTER 6
Financial Assets
Learning Objectives
1. Define a financial asset and give
examples.

2. Account for cash and cash

equivalents.

3. Account for receivables

4. Account for investments

Financial Instrument
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.
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;
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
one equity instruments.
Financial liability is any liability
that is:
a. A contractual obligation to deliver cash or another
financial asset to another entity;
b. A contractual obligation to exchange financial assets
or financial liabilities with another entity under conditions
that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity's
own equity instruments.
Equity instruments is any contract
that evidences a residual interest
in the assets of an entity after
deducting all of its liabilities.
 Example
Bank deposit is a financial instrument. It is a
contract that gives rise to both a financial asset
(i.e., Cash in bank) on the part of the depositor
and a financial liability (i.e., Deposit liability) on
the part of the bank. The depositor has a
contractual right to withdraw his cash while the
bank has a contractual obligation to deliver cash
when the depositor withdraws.
Initial Recognition
A financial asset is recognized when an entity becomes a
party to contractual provisions of the instrument.

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 Incremental Cost is
are incremental one that would not
costs that are have been incurred
directly attributable if the entity had not
to the acquisition, acquired, issued or
issue, or disposal of disposed the
a financial financial instrument.
instrument.
 Financial Assets
a. Cash and cash equivalents c. Investments

b. Receivables d. Derivatives
 Cash and Cash
Equivalents

Cash - comprises cash on hand, cash

in bank and cash treasury accounts.
 Adjustmets 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:

Date Cash in Bank, Local Currency-Current xx

   Accounts Payable (or other liability account) xx
Accounting for Cancelled Checks
A check is considered stale if it has been
outstanding for over 6 months from its date.
Replacement checks may be issued for cancelled
checks that were already released to payess, upon
submission of the cancelled checks to the
Accounting Unit. Cancelled checksare reverted back
to cash:
 Accounting for Cancelled Checks
The cancelled 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
Petty Cash Fund
It 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.
Guidelines:
a. 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.
b. The PCF Custodian shall be properly bonded
whenever the established amount of PCF
exceeds P5,000.
Guidelines:
c. 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 balance.
d. 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.
Guidelines:
e. PCF payments shall not exceed P15,000 for each
transaction, except when otherwise authorized by
law or by the COA. Splitting of transactions to avoid
exceeding the ceiling is prohibited.
f. 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.
Guidelines:
g. PCF disbursements shall be supported by
properly accomplished and approved Petty Cash
Vouchers, invoices, ORS, or other evidence of
disbursements.
h. Replenishment shall be made as soon as
disbursements reach at least 75% or as needed.
Guidelines:
i. 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.
j. 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
close his/her cash accountability.
 Illustration 1: After careful estimates of
recurring monthly petty expenses, the Head of
the Entity A approves the establishment of a
P 50,000 petty cash fund.

Date Petty Cash 50,000

Cash Modified Disbursement System 50,000
(MDS), Regular
To record the establishment of PCF
A cash count of the PCF reveals the Following:
Journal entries will be made when the PCF is:

(a) replenished or
(b) adjusted at the end of the period
for unreplenished expenses.
 Accounting for Cash
Shortage/Overage of Disbursing
Officer
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.
Relevant provision of law:
"The failure of a public officer to have duly forthcoming
any public funds or property with which he is chargeable,
upon demand by any duly authorized officer, shall be prima
facie evidence that he has put such missing funds or
property to personal use." (Revised Penal Code, Art. 217)
 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.

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.
Guidelines:
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 check becomes his personal liability. The
drawer and any endorser not given the notice will be
relieved from any liability.
c. A check refused by the drawee bank when presented within
90 days from its date is a prima facie evidence 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 for the full payment of
the check within 15 banking days after receiving the notice of
the dishonor.

. 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 therefor
Dishonored checks are recorded to the "Other receivables” account
as follows:
 Bank Reconciliation
A bank reconciliation statement is a report that
is prepared for purpose of bringing the
balances of cash
(a) per records and
(b) per bank statement into agreement.
 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. (PPSAS 2.8)

Only debt instruments acquired within 3 months

before their scheduled maturity date can qualify as
cash equivalents
 Receivables
Receivables represent claims for cash entities or
other assets from other entities.

Examples:
Accounts Receivable
Notes Receivable
Loans Receivables
Other Receivables
 Receivables
Receivables are initially measured at fair value plus
transaction costs and subsequently measured at
amortized cost.
Categories of Financial Assets
 Illustration 1:
Initial Measurement
Entity A acquires an investment for
P100,000. Transaction costs amount
to P10,000.
 Illustration 1: Entity A acquires an investment
for P100,000. Transaction costs amount to
P10,000.
Case 1: The investment is classified as Financial Asset
Held for Trading

Date Financial Assets Held for Trading 100,000

Other Financial Charges 10,000
Cash in Bank-Local Currency, Bangko 110,000
Sentral ng Pilipinas
 Illustration 1: Entity A acquires an investment
for P100,000. Transaction costs amount to
P10,000.
Case 2: The investment is classified as Held-to-Maturity
Investments

Date Investment in Treasury Bills-Local 100,000

Cash in Bank-Local Currency, Bangko 110,000
Sentral ng Pilipinas
 Illustration 1: Entity A acquires an investment
for P100,000. Transaction costs amount to
P10,000.
Case 3: The investment is classified as Available-for-Sale
Assets

Date Investment in Stocks (or Bonds) 100,000

Cash in Bank-Local Currency, Bangko 110,000
Sentral ng Pilipinas
 Illustration 2:
Subsequent Measurement
Assume the investment in Illustration 1
is investment in stocks. The fair value
at the end of the period is P120,000.
 Illustration 2: Assume the investment in
Illustration 1 is investment in stocks. The fair
value at the end of the period is P120,000.
Case 1: The investment is classified as Financial Asset
Held for Trading

Date Financial Assets Held for Trading 20,000

Gain from Changes in Fair Value of 20,000
Financial Instruments (120K-100K)
 Illustration 2: Assume the investment in
Illustration 1 is investment in stocks. The fair
value at the end of the period is P120,000.
Case 2: The investment is classified as Available-for-Sale
Financial Assets

Date Investment in Stocks 10,000

Unrealized Gain/Loss from Changes 10,000
in Fair Value of Financial Assets
(120K-110K)
 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
classfies them as held-to-maturity investments. The
issuer pays annual interest every December 31. The
effective interest rate is 6%
Amortization Table:
Interest Interest
Date Amortization Present Value
Received Income

1/1/x1 957,876

12/31/x1 50,000 57,473 7,473 965,349

12/31/x2 50,000 57,921 7,921 973,270

12/31/x3 50,000 58,396 8,396 981,666

12/31/x4 50,000 58,900 8,900 990,566

12/31/x5 50,000 59,434 9,434 1,000,000

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 classfies them as held-to-
maturity investments. The issuer pays annual interest every
December 31. The effective interest rate is 6%

1/1/x1 Investment in Bonds 957,876

Cash in Bank-Local Currency, Bangko 957,876
Sentral ng Pilipinas
To recognize investment in bonds
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 classfies them as held-to-
maturity investments. The issuer pays annual interest every
December 31. The effective interest rate is 6%
12/31/x1 Cash in Bank-Local Currency, Bangko 50,000
Sentral ng Pilipinas
Investment in Bonds 7,473
Interest Income 57,473
To recognize interest income
Impairment of Financial Assets
An entity shall assess at the end of each
reporting period whether there is any objective
evidence that a financial asset or group of
financial assets is impaired.
Derecognition of Financial Assets
A financial asset is derecognized when:
a. The contractual rights to the cash flows
from the financial asset expire or are
waived; or
b. The financial asset is transferred and the
transfer qualifies for derecognition
 Illustration: Impairment and Derecognition
Entity A, a government hospital, receives promissory
notes from several patients amounting to P1,000,000.

Date Notes Receivable 1,000,000

Hospital fees 1,000,000
To recognize receipt of
promissory notes
 Illustration: Impairment and Derecognition
At year-end, it was estimated that P300,000 notes are
impaired.

Date Impairment Loss-Loan and Receivables 300,000

Allowance for Impairment-Notes 300,000
Receivable
To recognize impairment of notes
receivable
 Illustration: Impairment and Derecognition
A subsequent audit reveals that P100,000 of the impaired
notes cannot be collected anymore. The COA authorizes
the derecognition (write-off) of these notes.

Date Allowance for Impairment-Notes Receivable 100,000

Notes Receivable 100,000
To recognize derecognition of notes
receivable
Derivatives
Characteristics of a derivative:
a. Its value changes in response to the
change in an underlying;
b. It requires no initial net investment; and
c It is settled at a future date
 Hedging
Hedging relationships:
a. Fair value hedge
b. Cash flow hedge
c. Hedge of a net investment in a foreign operation
Hedging relationships
a. Fair value hedge - a hedge of the exposure
to changes in fair value of a recognized asset or
liability or an unrecognized firm commitment, or
an identified portion of such an asset, liability, or
firm commitment, that is attributable to a
particular risk and could affect surplus or deficit.
Hedging relationships
b. Cash flow hedge - a hedge of the exposure to
variability in cash flows that (i) is attributable to a
particular risk associated with a recognized asset
or liability or a highly probable forecast
transaction and (ii) could affect surplus or deficit.
Hedging relationships
c. Hedges of net investment in a foreign operation
- a hedge of the currency risk associated with the
translation of the net assets of these foreign
operations into the group's currency.
 Hedging

Components of a hedging relationship:

a. Hedging Instrument
b. Hedged Item
Components of a hedging relationship
a. Hedging Instrument - a designated
derivative or a designated non-derivative
financial asset or non-derivative financial liability
whose fair value or cash lows are expected to
offset changes in the fair value or cash flows of
designated hedged item.
Components of a hedging relationship
b. Hedged Item - an asset, liability, firm
commitment, highly probable forecast
transaction or net investment in a foreign
operation that (i) exposes that entity to risk of
changes in fair value or future cash flows and (ii)
is designated as being hedged.
 CHAPTER 7
Inventories
Learning Objectives:
1. Account for inventories by a
government entity.

2. Describe the procedures in

the receipt and disposition of
inventories by a government
entity.
Inventories are assets:

a. Held for sale or distribution in the ordinary course of

operations (finished goods),

b.
In the process of production for sale or distribution
(work in process); or
In the form of materials or supplies to be consumed in
c. the production process or distributed in the rendering
of services (raw materials and supplies).
Inventories in government entities:
1. Inventory Held for Sale
2. Inventory Held for Distribution
3. Inventory Held for Manufacturing
4. Inventory Held for Consumption
5. Semi-Expendable Property
 Measurement
Inventories are initially measured at cost
and subsequent measured as follows:

Goods held for sale Goods held for distribution

Lower of cost and
Lower of Cost and
current replacement
Net realizable value.
cost.
 Measurement
Cost comprrises the following:

Purchase Costs Direct Costs

excluding trade
incurred in bringing
discounts, rebate, and
the asset to its
other similar
intended location
deductions in
purchase price. and condition.
 Measurement
Cost excludes the following:

a. Abnormal amounts of wasted materials,

labor, and production overhead;
b. Selling costs; and
c. Administrative overheads
 Measurement
Exceptions:

a. Inventories received from non-exchange

transaction are initially measured at acquisition-
date fair value.
b. Agricultural produce are initially measured at
fair value less cost to sell at the point of harvest.
Cost Formula:
Cost of goods sold and cost of inventories on hand
are determined using the following cost formulas:
Specific identification Weighted average cost
this shall be used for items this shall be used for large
that are not ordinarily numbers of items of
interchangeable (i.e., inventory that are
unique) and those that are ordinarily interchangeable.
segregated for specific This shall be applied under
projects. perpetual inventory system
Recognition as an Expense
The carrying amount of an inventory
recognized as expense in the period it is
sold, distributed, exchanged, or
consumed. The write-down of inventory
to its NRV or Current replacement cost, as
appropriate, is also recognized as
expense.
 Receipt and Disposition of Inventories Receipt
1. End users prepare the Purchase Request (PR) form to request for the
purchase of items not available on stock. The PR is the basis in preparing
the Purchase Order.

2. The authorized official prepares the Purchase Order (PO). The Purchase
Order is a document issued to the supplier when making a purchase. It
indicates the specifications, quantities, and agreed prices of the items being
purchased. The PO serves as contract between the entity and the supplier.

3. When the purchased items are delivered, the Property/Supply Division

signs the "received" portionof the Delivery Receipt (DR) and prepares the
Inspection and Acceptance Report (IAR). 1.The IAR will be used by the
Property Inspector in inspecting and accepting the delivered items.
Receipt
 Receipt and Disposition of Inventories Receipt

4. The Property Inspector inspects the conformance of the delivered items

with the specifications in both the PO and DR and indicates the result of the
inspection (i.e., acceptance or rejection) in the IAR. Rejected deliveries will
be returned to the supplier.

5. The Property/Supply Division, through the Stock Card Keeper, records

the accepted deliveries in the Stock Card (SC)The SC shows the of all
receipts and issuances of inventory, as well as the available balance at any
given point of time.

Receipt
 Receipt and Disposition of Inventories Receipt

6. The Accounting Division records the accepted deliveries in the books of

accounts and in the Supplies Ledger Card (SLC). The SLC shows both the
quantities and monetary amounts of all receipts and issuances of
inventory, as well as the available balance at any given point of time.

7. The Property/Supply Division prepares the Disbursement Voucher (DV)

then forwards it, together with supporting documents, to the Accounting
Division for processing of payment.

Receipt
 Receipt and Disposition of Inventories Receipt
8. End users prepare the Requisition and Issue Slip (RIS) to request for the
issuance of items available on stock. The Head of the requesting individual
shall approve the RIS. The approved RIS is then forwarded to the
Property/Supply Division.

9. The Property/Supply Division prepares the Report of Supplies and

Materials Issued (RSMI). The RSMI will be used by the Stock Card Keeper in
updating the SC and the Accounting Division in journalizing the items issued.

10. The Accounting Division records the items issued in the books of
accounts and updates the SLC.

Disposition
 Receipt and Disposition of Inventories Receipt
1.The following are other documents used in the disposition of inventories:

a. Waste Materials Report — prepared by the Property or Supply Custodian

to report wasted materials, such as destroyed spare parts and other
spoilages.
b. Report on the Physical Count of Inventories —used in reporting the results
of physical counts. It shows the balance of inventory, as well as any
shortages or overages.
c. Report of Accountability for Accountable Forms — used to report the
movement and status of accountable forms in the possession of an officer.
d. Inventory Custodian Slip — prepared when issuing semi- expendable
property.

Disposition
 Conclusion
The inventories of government entities include the following:
1. Inventory Held for Sale,
2. Inventory Held for Distribution (e.g., welfare goods held
for distribution),
3. Inventory Held for Manufacturing,
4. Inventory Held for Consumption (e.g., office supplies),
and
5. Semi-Expendable Property (PPE-like items below the
P15,000 capitalization threshold for PPE).
 Conclusion
Goods held for sale are subsequently measured at the
Lower of Cost and NRV while goods held for
distribution are subsequently measured at the Lower
of Cost and Current replacement cost.

The FIFO cost formula and the Periodic inventory

system are not used by government entities.
Question
Time