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The amortized cost of a financial liability includes only the initial recognition amount and principal repayments.
The amortized cost of a financial liability includes only the initial recognition amount and principal repayments.
False
A financial instrument can be defined as a contract that creates a financial asset for one entity and a financial equity for another.
A financial instrument can be defined as a contract that creates a financial asset for one entity and a financial equity for another.
False
Equity instruments can be defined as forms of unitized capital like ordinary or preference shares.
Equity instruments can be defined as forms of unitized capital like ordinary or preference shares.
True
A financial liability includes a contractual obligation to deliver cash or to exchange financial liabilities under potentially favorable conditions.
A financial liability includes a contractual obligation to deliver cash or to exchange financial liabilities under potentially favorable conditions.
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Financial instruments must be classified solely based on the issuer's intention when they are initially recognized.
Financial instruments must be classified solely based on the issuer's intention when they are initially recognized.
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Derivatives derive their value solely from the interest rate of the underlying asset.
Derivatives derive their value solely from the interest rate of the underlying asset.
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National Government Agencies are required to prepare a Registry of Accounts Written-Off as part of their financial reporting.
National Government Agencies are required to prepare a Registry of Accounts Written-Off as part of their financial reporting.
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The BTr is responsible for maintaining records exclusively for grant utilizations and is not concerned with loan repayments.
The BTr is responsible for maintaining records exclusively for grant utilizations and is not concerned with loan repayments.
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Initial recognition of a financial asset occurs when an entity participates in the contractual provisions of the instrument.
Initial recognition of a financial asset occurs when an entity participates in the contractual provisions of the instrument.
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All financial assets are classified at fair value through surplus or deficit if their fair value can be reliably estimated.
All financial assets are classified at fair value through surplus or deficit if their fair value can be reliably estimated.
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Held-to-maturity investments are categorized under financial assets that cannot be sold before maturity.
Held-to-maturity investments are categorized under financial assets that cannot be sold before maturity.
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When a financial asset at fair value through surplus or deficit is recognized, it should be measured at its face value initially.
When a financial asset at fair value through surplus or deficit is recognized, it should be measured at its face value initially.
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Transaction costs related to the acquisition of financial assets are ignored when measuring financial assets at fair value through surplus or deficit.
Transaction costs related to the acquisition of financial assets are ignored when measuring financial assets at fair value through surplus or deficit.
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Transaction costs for financial assets measured at fair value through surplus or deficit are included in the asset's value.
Transaction costs for financial assets measured at fair value through surplus or deficit are included in the asset's value.
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Loans and receivables are measured at their fair value using the effective interest method.
Loans and receivables are measured at their fair value using the effective interest method.
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Equity instruments without a quoted market price are measured at fair value if their fair value can be reliably measured.
Equity instruments without a quoted market price are measured at fair value if their fair value can be reliably measured.
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If a financial liability is recognized at fair value through surplus or deficit, the related transaction costs are deducted from its value.
If a financial liability is recognized at fair value through surplus or deficit, the related transaction costs are deducted from its value.
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After initial recognition, financial liabilities must always be measured at fair value.
After initial recognition, financial liabilities must always be measured at fair value.
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A financial liability is recognized in the statement of financial position only after the contractual provisions of the instrument have been agreed upon.
A financial liability is recognized in the statement of financial position only after the contractual provisions of the instrument have been agreed upon.
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Transaction costs attributed to financial liabilities measured at amortized cost are expensed immediately.
Transaction costs attributed to financial liabilities measured at amortized cost are expensed immediately.
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For financial assets classified as available-for-sale, changes in fair value are recognized in the financial statements immediately.
For financial assets classified as available-for-sale, changes in fair value are recognized in the financial statements immediately.
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Study Notes
Financial Instruments
- A financial instrument is any contract that creates a financial asset for one entity and a financial liability or equity instrument for another. (Para. 9, PPSAS 28)
- A financial asset is any asset that:
- Is cash
- Is an equity instrument of another entity
- Is a contractual right to receive cash or another financial asset from another entity
- Is a contractual right to exchange financial instruments with another entity under potentially favorable conditions
- Is a contract that may be settled in the entity's own equity instruments
Financial Liability
- A financial liability is any liability that is:
- A contractual obligation to deliver cash or another financial asset to another entity
- A contractual obligation to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable
- A contract that will or may be settled in the entity's own equity instruments
Equity Instrument
- An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.
Derivative
- A derivative is a financial instrument that derives its value from the movement in commodity price, foreign exchange rate, and interest rate of an underlying asset or financial instrument.
Initial Recognition of Financial Assets
- An entity recognizes a financial asset when it becomes a party to the contractual provisions of the instrument. (Para. 16, PPSAS 29)
Categories of Financial Assets
- Financial asset at fair value through surplus or deficit:
- A held-for-trading asset
- An asset designated at fair value through surplus or deficit on initial recognition. Any financial asset can be classified in this category if its fair value can be reliably estimated.
- Held-to-maturity investments
- Loans and receivables
- Available-for-sale financial assets
Initial Measurement of Financial Assets
- A financial asset at fair value through surplus or deficit is measured at its fair value initially.
- A financial asset not at fair value through surplus or deficit is measured at its fair value plus transaction costs directly attributable to its acquisition, issue, or disposal. (Para. 45, PPSAS 29)
- Transaction costs for instruments measured at fair value through surplus or deficit are expensed immediately.
Initial Recognition of Financial Liabilities
- An entity recognizes a financial liability when it becomes a party to the contractual provisions of the instrument. (Para. 16, PPSAS 29)
Initial Measurement of Financial Liabilities
- A financial liability is recognized initially at its fair value plus any transaction costs directly attributable to the issuance of the liability. (Par. 45, PPSAS 29)
- Transaction costs associated with liabilities, designated at fair value through surplus and deficit, are expensed immediately.
- Transaction costs for liabilities measured at amortized cost are included in the initial measurement.
Subsequent Measurement of Financial Assets
- Financial assets, including derivatives, are measured at fair value, without deduction for transaction costs, except for:
- Loans and receivables and held-to-maturity investments, which are measured at amortized cost using the effective interest method
- Investments in equity instruments without a quoted market price, and their related derivatives, which are measured at cost. (Par. 48, PPSAS 29)
Change in Fair Value of Financial Assets Held for Trading
- Changes in fair value of financial assets held for trading are recognized in surplus or deficit on December 31, 2014.
Change in Fair Value of Available-for-Sale Financial Assets
- Changes in fair value of available-for-sale financial assets are recognized in the statement of changes in net assets on December 31, 2014.
Loan Receivable at Amortized Cost
- On January 1, 2014, an NGA granted a loan to an LGU.
- The loan includes annual interest at 6%.
- A partial payment was made on December 30, 2014.
Adjusting Journal Entries (JEs) for Impairment Loss
- Example 1: Impairment of Accounts Receivable:
- Impacted Account: Impairment Loss-Loans and Receivables, Allowance for Impairment-Accounts Receivable
- Impairment Loss on accounts receivable.
- Example 2: Impairment of Loans Receivable from an LGU
- Impacted Account: Impairment Loss-Loans and Receivables, Allowance for Impairment-Loans Receivable
Derecognition of Financial Assets
- An LGU pays its outstanding loan balance to an NGA.
- The NGA derecognizes the receivable account because the contractual rights to the related cash flows expire.
Derecognition of Financial Liability
- A government entity pays off a loan from a local creditor.
- The entity derecognizes the liability.
Presentation of Financial Instruments
- Classification of instruments should match the substance of the contractual arrangement, following the definitions of financial assets, liabilities, and equity instruments
Accounting Examples
- Examples of financial instruments (e.g., bonds, loans, cash), their accounting treatments, and the related journal entries, are provided. The accounting details may include details on fair value, carrying amounts, and amortization schedules.
Reports
- Forms and reports: Schedules of Accounts Payable, Accounts Receivable, and Accounts Written-Off.
- Record Maintenance: Loan availments, repayments, grant availments, and utilization, and guaranteed loans. Automated computerized system for recording.
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Description
Test your knowledge on financial instruments and financial liabilities. This quiz covers the definitions, characteristics, and examples of financial assets and liabilities as outlined in PPSAS 28. Assess your understanding and application of these key financial concepts.
