Accounting Chapter 1: Cash and Cash Equivalents

Chapter 1: Cash and Cash Equivalents

• Assets: economic resources controlled by an entity as a result of past events
• Financial assets: group of assets evidenced by financial instruments
  • Arise from a contract that entitles the holder to receive cash or another financial asset
  • Include derivatives
• Cash: most significant financial asset due to its ability to settle obligations, acquire assets, pay operating costs, or provide returns to owners
  • Recognized at face value, must be unrestricted and available for use in current operations
  • Includes bills, coins, demand credit instruments, and cash funds
• Cash funds: qualify to be reported as cash in the current assets section of the statement of financial position
  • Examples: payroll fund, working fund, change fund, petty cash fund, interest fund, and dividend fund
• Cash equivalents: highly liquid financial instruments with insignificant risk of change in value due to interest rates
  • Matures normally within 3 months or less from the date of acquisition
  • Examples: temporary investments in debt securities, commercial paper, and treasury bills

Chapter 2: Receivables

• Receivables: represent any legal claim from others for money, goods, or services
  • Include amounts collectible from customers and others, accrued revenues, and other items
• Trade receivables: arise from the sale of goods or services in the ordinary course of business
  • Classified as current assets, regardless of the length of the entity's normal operating cycle
• Non-trade receivables: arise from other sources, such as loans and advances, accrued interest, and dividends
  • Classified as current or non-current assets, depending on the expected collection period
• Initial recognition: based on IFRS 9, recognize a financial asset in the balance sheet when the entity becomes a party to the contractual provision of the instrument
• Accounting for accounts receivable and related revenues:
  • Trade discounts: deducted from the list price prior to recording the accounts receivable
  • Cash discounts: reductions from the sales price to prompt payment of an account

Chapter 4: Investments in Equity Securities

• Equity security: an instrument representing ownership shares and rights, warrants, or options to acquire or dispose of ownership shares
  • Provides highest returns to investors
  • Yield/returns: dividends, gains, and losses from disposal, and appreciation in value
• Reasons for investing:
  • Temporary placements of excess cash
  • Obtain long-term customer, supplier, or creditor relationship
  • Exercise significant influence or control over the operating policies of another entity
• Classification:
  • Trading equity securities (FVPL)
  • Non-trading equity securities (FVPL or FVOCI, irrevocable choice)
  • Investment in associate (participate but not control financial and operating policy decisions)
  • Investment in subsidiary (power to govern the financial and operating policies of the investee entity)
  • Investment in joint venture (jointly controls operations of another entity through share capital ownership)
• Recognition:
  • Initial recognition: at fair value, with transaction costs expensed outright (FVPL) or capitalized as cost (FVOCI)
  • Subsequent recognition: changes in fair value at the reporting date recorded in profit or loss (FVPL) or other comprehensive income (FVOCI)
• Transactions subsequent to initial recognition:
  • Share split: memo entry only, with no effect on the financial statements
  • Dividends: considered as income, with three dates: date of declaration, date of record, and date of payment### Dividends
• There are four types of dividends:
  • Cash dividend
  • Bonus issue or stock dividend
  • Property dividend
  • Scrip dividend (new shares of an issuer's stock instead of a dividend)

Cash Dividends

• Received when declared by the board of directors
• Important dates:
  • Date of declaration
  • Date of record (determines who receives the dividend)
  • Date of payment (distributes the dividend to shareholders)
• Journal entries:
  • Received cash dividend: Debit Cash, Credit Dividend Revenue
  • Received cash dividend on the next period: Debit Dividend Receivable, Credit Dividend Revenue

Bonus Issue or Share Dividend

• Issuance of additional shares of the same class
• No journal entry, just a memorandum entry
• Example: Original 1,000 shares at $120 each = $120,000, receive 200 additional shares due to 20% bonus issue, new carrying amount per share = $120,000 / 1,200 = $100

Property Dividends

• Dividends distributable as investee's non-cash assets
• Journal entry: Debit Equity Investments, Credit Dividend Revenue

Scrip Dividends

• New shares of an issuer's stock instead of a dividend
• Accounting treatment:
  • Debit Retained Earnings, Credit Notes Payable to Stockholders (at declaration)
  • Debit Notes Payable to Stockholders, Debit Interest Expense, Credit Cash (at payment)

Share Rights

• Legal right granted to shareholders to subscribe for new shares
• Valuable because the price at which new shares are sold is generally below the prevailing market price
• Considered as securities held for trading and measured at fair value
• Investor may sell rights, use rights to purchase additional shares, or allow the rights to lapse

Investment in Associate

• Purchase of equity shares of another entity to exert significant influence
• Definition:
  • Significant influence: power to participate in financial and operating policy decisions
  • Associate: entity over which the investor has significant influence
• Accounting method:
  • Equity method: based on economic relationship between investor and investee
  • Initial investment at cost, subsequent carrying amount increased by share of profit and loss of investee
• Classification:
  • Financial assets at fair value through profit or loss (FVPL)
  • Financial assets at fair value through other comprehensive income (FVOCI)
  • Financial assets at amortized cost

Discontinuance of Equity Method

• Use fair value at FVPL, FVOCI, or cost

• Difference between carrying amount and fair value of retained investment in profit or loss

• Difference between net proceeds from disposal and carrying amount of investment in profit or loss### Share Warrant

• A share warrant is a right that gives the holder the option to purchase a share at a specified price

• An investor receives share rights without any cost

• An investor can:

  • Sell the rights
  • Use the rights to purchase additional shares
  • Allow the rights to lapse

Memorandum Entry and Journal Entries

• Initially, share rights are recorded as a memorandum entry because they do not have a known fair value
• Exercise price or subscription price for the share is important to note
• Journal entries are made for the exercise of the right, sold rights, and lapsed rights
• Theoretical fair value of share rights can be used when the actual fair value is not available

Investments in Unquoted Equity Instruments

• All investments in equity instruments in associates, joint ventures, and subsidiaries should be measured at fair value
• If there is insufficient information to measure at fair value, cost can be used, except when the cost does not represent the fair value
• Significant changes in the investee's performance, market, economy, or internal matters can affect the fair value

Financial Statement Presentation

• Financial assets measured at fair value through profit or loss (FVPL) are presented as current assets
• Financial assets measured at fair value through other comprehensive income (FVOCI) are presented as non-current assets

Impairment of Equity Investments

• Equity investments measured at fair value are not tested for impairment, as fair value is already considered
• Investments in associates and joint ventures are accounted for using the equity method

Associate and Joint Venture

• An associate is an entity over which the investor has significant influence
• A joint venture is an arrangement where the parties have rights to the net assets of the arrangement
• Significant influence is the power to participate in the financial and operating policy decisions of the investee
• Evidence of significant influence includes representation on the board of directors, participation in policy-making, material transactions, and more

Equity Method

• Investment in an associate or joint venture is initially recognized at purchase price plus transaction costs
• Share in the profit of the investee is recognized after the date of acquisition
• If the fair value is greater than the carrying amount, the excess is amortized as an adjustment to the investment account
• Undervalued inventory, goodwill, and other excesses are accounted for accordingly

Disposal of Investment in Associate

• When an investor disposes of an investment, the difference between the net disposal proceeds and the carrying value is recognized as a gain or loss
• The carrying value is determined using the equity method

Reclassification of Equity Securities

• Reclassification from investment in associate to investment at fair value or vice versa is done when significant influence is gained or lost
• The fair value of the retained investment is determined, and the gain or loss is recognized in profit or loss

Investment Property

• Investment property is land or a building (or part of a building) held to earn rentals or capital appreciation
• It is not used in production, supply, or administrative purposes, or for sale in the ordinary course of business
• Property held for future use as owner-occupied property, or property occupied by employees, is not considered investment property

Initial Recognition and Subsequent Measurement

• Investment property is recognized when probable that future economic benefits will flow to the entity and the cost can be reliably measured
• Initial recognition is at cost, including transaction costs
• Subsequent measurement can be done using the fair value model or the cost model
• If the fair value model is used, gains or losses are recognized in profit or loss
• If the cost model is used, the property is measured at cost minus accumulated depreciation and impairment losses

Transfers to and from Other Classification

• Transfers are made when there is a change in use, such as commencement of owner-occupation or development with a view to sale
• The fair value is the cost in its new classification
• The difference between the fair value and its carrying amount is recognized as a revaluation surplus or loss

Presentation on the Statement of Financial Position

• Investment property is separately shown as a line item on the face of the statement of financial position
• It is presented as a non-current asset

Derecognition

• Investment property is derecognized on disposal or when it is withdrawn from use and no future economic benefits are expected
• The difference between the net disposal proceeds and the carrying amount is recognized as a gain or loss