Financial Instruments PDF

Financial Instruments Government Accounting Financial Instruments 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. (Par. 9, PPSAS 28) Financial asset – is any asset that is: 1. Cash;...

Financial Instruments Government Accounting Financial Instruments 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. (Par. 9, PPSAS 28) Financial asset – is any asset that is: 1. Cash; 2. An equity instrument of another entity; 3. A contractual right to receive cash or another financial asset from another entity; 4. A contractual right to exchange financial instruments with another entity under conditions that are potentially favorable; or 5. A contract that will or may be settled in the entity’s own equity instruments. Financial liability – is any liability that is: 1. A contractual obligation: i. To deliver cash or another financial asset to another entity; or ii. To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity. 2. A contract that will or may be settled in the entity’s own equity instruments.  Equity instrument – is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities 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 Asset An entity shall recognize a financial asset in its statement of financial position when it becomes a party to the contractual provisions of the instrument. (Par. 16, PPSAS 29) Categories of Financial Assets a. Financial asset at fair value through surplus or deficit. 1. A held-for-trading asset, or 2. An asset designated as 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. b. Held-to-maturity investments c. Loans and receivables d. Available-for-sale financial assets Initial Measurement of Financial Assets When a financial asset at fair value through surplus or deficit is recognized initially, an entity shall measure it at its fair value. In the case of a financial asset not at fair value through surplus or deficit, the financial asset is recognized at fair value plus transaction costs that are directly attributable to the acquisition, issue or disposal of the financial asset. (Par. 45, PPSAS 29) If the financial asset is measured at fair value through surplus or deficit, transaction costs are expensed outright. Example for Financial Asset at Fair Value through surplus or deficit Example for Financial Asset not at Fair Value through surplus or deficit Subsequent Measurement of Financial Assets After initial recognition, an entity shall measure financial assets, including derivatives that are assets, at their fair values, without any deduction for transaction costs it may incur on sale or other disposal, except for: a. Loans and receivables and Held-to-maturity investments, which shall be measured at amortized cost using the effective interest method; and b. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, which shall be measured at cost. (Par. 48, PPSAS 29) Change in fair value of the Financial Assets Held for Trading Change in the fair value of the Available-for- sale Loan Receivable – at Amortized Cost Adjusting JE to recognize impairment loss Derecognition of Financial Assets Financial Liability Recognition of a Financial Liability. An entity shall recognize a financial liability in its statement of financial position when it becomes a party to the contractual provisions of the instrument. (Par. 16, PPSAS 29) Initial Measurement of Financial Liabilities When a financial liability is recognized initially, an entity shall measure it at its fair value plus, in the case of a financial liability not at fair value through surplus or deficit, transaction costs that are directly attributable to the issue of the financial liability. (Par. 45, PPSAS 29) For financial liability designated initially as at fair value through surplus and deficit, the related transactions costs are expensed immediately. For financial liability measured at amortized cost, transaction costs are included in the initial measurement. Subsequent Measurement of Financial Liabilities After initial recognition, an entity shall measure a financial liability at amortized cost using the effective interest method. The “amortized cost” of a financial liability is the amount at which the financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility. (Par. 10, PPSAS 29) Derecognition of Financial Liability Equity Instrument The term “equity instrument” may be used to denote the following: a. A form of unitized capital such as ordinary or preference shares; b. Transfers of resources (either designated or agreed as such between the parties to the transaction) that evidence a residual interest in the net assets of another entity; and/or c. Financial liabilities in the legal form of debt that, in substance, represent an interest in an entity’s net assets. (AG27, PPSAS 28) Presentation of Financial Instruments The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, a financial liability and an equity instrument. (Par. 13, PPSAS 28) Forms and Reports to be Prepared and Maintained a. To be prepared by all National Government Agencies 1. Schedule of Accounts Payable (Appendix 54) 2. Schedule of Accounts Receivable (Appendix 55) 3. Registry of Accounts Written-Off (Appendix 56) b. The BTr shall maintain records on loan availments and repayments, grant availments and utilization, and guaranteed loans using its computerized application.