Financial Assets and Accounting Standards

Study Notes

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.

Description

This quiz covers the definition and characteristics of economic resources, financial assets, and their recognition and measurement according to IAS 32. Test your knowledge of financial instruments and accounting standards.