Financial Assets and Accounting Standards

Economic Resources and Financial Assets

• An economic resource is a right that has the potential to produce economic benefits, embodied in assets used to generate revenues, acquire other assets, settle liabilities, or distribute to enterprise owners.
• The nature of a financial asset determines which accounting standard is applicable to its recognition and measurement.

Financial Instruments and Derivatives

• A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity to another (IAS 32).
• A derivative is a financial instrument that:
  • Its value changes in response to specified variables (e.g., interest rate, commodity price, financial instrument price).
  • Requires no initial net investment or initial net investment smaller than similar contracts.
  • Is settled at a future date (e.g., options and warrants).

Recognition of Financial Assets

• Recognition of financial assets depends on attributes, relevance, and faithful representation.
• The probability of a flow of economic benefits and existence uncertainty affect the relevance of information.
• An entity recognizes a financial asset when it becomes a party to the contractual provisions of the instrument (IFRS 9).

Cash as a Financial Asset

• Cash is the most significant financial asset due to its ability to settle an obligation, acquire another asset, pay operating costs, or provide returns to enterprise owners.
• Cash refers to currency and coins in circulation, recognized at face value, and must be unrestricted and available for use in current operations.
• Examples of cash include:
  • Bills and coins on hand
  • Demand credit instruments (checks, bank drafts, postal money orders, and currency demand deposits with banks)

Cash Funds

• Cash funds held for current operations qualify to be reported as cash in the current assets section of the statement of financial position.
• Examples of cash funds include:
  • Payroll fund
  • Working fund
  • Change fund
  • Petty cash fund
  • Interest fund
  • Dividend fund
• Cash funds intended for non-current assets or settlement of long-term obligations are classified as non-current, unless the long-term obligation becomes due within 12 months after the end of the reporting period.

Reporting Cash Balance

• Foreign currency cash and deposits in foreign banks should be translated to the local currency using the exchange rate at the end of the reporting period.
• Cash in closed banks or in banks having financial difficulty or in bankruptcy should be reclassified as receivable and written down to recoverable amount.
• Customers' postdated checks, NSF checks, and IOUS should be reported as receivables.
• Postage stamps and expense advances are reported as prepaid expenses, while bank overdrafts are reported as liabilities.