IFA-I Chapter 3 Cash and Cash Equivalents (IAS 7 and IFRS 9) PDF

Chapter 3: Cash and Cash Equivalents (IAS 7 and IFRS 9) Monday, November 18, 2 1 024  Learning Objectives  Overview of Financial Instruments  Cash and internal control  Reporting of Cash and disclosure requirements  Recognition and...

Chapter 3: Cash and Cash Equivalents (IAS 7 and IFRS 9) Monday, November 18, 2 1 024  Learning Objectives  Overview of Financial Instruments  Cash and internal control  Reporting of Cash and disclosure requirements  Recognition and valuation of accounts receivable  Recognition and valuation of notes receivable  DE recognition of receivables  Reporting of receivables and disclosure requirements 2 Monday, November 18, 2024  Overview of Financial Instruments  Types of Assets Physical Assets Assets Financial assets 3 Monday, November 18, 2024  Overview of Financial Instruments Definition of financial instrument  Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial Assets instruments Financial Financial Liabilities Equity instrument Derivatives 4 Monday, November 18, 2024  Financial Assets (IFRS9) Definition Any asset that is: Cash an equity instrument of another entity a contractual right to receive cash or another financial asset a contractual right to exchange financial assets or liabilities with another entity on potentially favourable terms Examples of financial assets:  Cash  Trade receivables  Investment in shares 5 Monday, November 18, 2024  Financial Liabilities (IFRS9) Definition Any liability that is:  a contractual obligation to deliver cash or another financial asset  a contractual obligation to exchange financial assets or liabilities with another entity on potentially unfavorable terms. Examples of financial liabilities:  Trade payables  Debenture (like a certificate of loan) loans payable  Redeemable (repaid after a period) preference (non- equity) shares 6 Monday, November 18, 2024  Equity instrument(IFRS9) Definition  A contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.  Examples of equity instruments:  Common stock  Preferred stock 7 Monday, November 18, 2024  CASH & Cash Equivalents Objectives:  Presenting accounting for cash and cash equivalents as regards to: - Measurement, - Classification, - presentation, and - Reporting 8 Monday, November 18, 2024  Key questions  What is cash? Cash equivalents?  What constitutes cash and cash equivalents?  How do we measure cash and cash equivalents?  How do we classify and present cash and cash equivalents?  How do we report cash and cash equivalents? 9 Monday, November 18, 2024  Applicable Standards  Accounting for Cash and Cash Equivalents is mainly governed by:  IAS 7 - Statement of Cash Flows  IFRS 9 - Financial Instruments: classification, measurement, impairment, hedging  Objective of the Standard:  is to require the provision(providing) of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows. 10 Monday, November 18, 2024  Basic Concepts & Terminologies Cash:  Comprises cash on hand and demand deposits.  Held in the form of currencies & notes that are generally acceptable as a means of exchange.  Includes the physical currency notes and coins comprising foreign currency  Bank overdraft if payable on demand 11 (for the lender) Monday, November 18, 2024  Basic Concepts & Terminologies (Continued) Cash Equivalents: Are short-term, highly liquid investments Are readily convertible to known amounts of cash Are subject to an insignificant risk of changes in value. Are non-physical cash instruments which can be converted to physical cash within a period of 90 days with little or no transaction costs! E.g 12 Commercial Monday, paper, Marketable November 18, 2024  Scope & Exclusions of Cash & Cash  Equivalents (Continued) Exclusions  Cash & cash equivalents do not include the following:  Cash Advances with respect to entities neither fully nor proportionally consolidated in the group FS;  Equity Investments unless they are, in substance cash equivalents such as a Preferred Stock with specified short redemption date.  13 Monday, November 18, 2024  Review questions  Cash and cash equivalents include all of the following except: a. Cash held in the form of currencies and notes b. Demand deposit c. Equity Investments which do not have the characteristics of cash equivalents d. Bank overdraft which is payable on demand e. Cash on hand 14 Monday, November 18, 2024  Measurement  Cash and Cash Equivalents;  Cash is carried at its face value which is equivalent to fair value.  Cash and cash equivalents in foreign currencies are:  translated at the exchange rate of the date of the operation  Converted to reporting currency on the reporting dated at closing rates 15 Monday, November 18, 2024  Presentation  Cash and Cash Equivalents;  Distinguish cash available for general operations from restricted cash  Classify cash or cash equivalent assets as a current cash or cash equivalent asset when it is not restricted from being exchanged or used to settle a liability for at least twelve months from the balance sheet date.  Classify restricted cash as non-current asset 16 Monday, November 18, 2024  Presentation (cont’d) Examples of restricted cash:  Cash and cash equivalents held by a Group subsidiary that operates in a country where there are exchange controls or legal constraints  Sinking fund  Proceeds of a construction mortgage that is restricted for use only for construction costs  Funds allocated for special purposes by action of the company’s board of directors. 17 Monday, November 18, 2024  Exercise Identify whether each of the following cash is restricted or not: 1. Checking account held for general payments 2. Payroll Fund 3. Petty Cash fund 4. Cash and cash equivalents held by a Group subsidiary that operates in a country where there are exchange controls or legal constraints 5. Purchase fund 6. Change fund 7. Sinking fund 8. Proceeds of a construction mortgage that is restricted for use only for construction costs 18 Monday, November 18, 2024  Presentation (cont’d) Offsetting of cash accounts:  Cash debit and credit accounts with the same financial entity shall not be reported net, unless as a result of contractual agreements. e.g. Assume that EEU has two checking accounts with CBE (Arada and 6-kilo branches). The account with Arada branch shows a debit balance of ETB 50,000 and that of 6-kilo branch shows a credit balance of ETB 10,000. How does EEU report these balances in the balance sheet? 19 Monday, November 18, 2024  Presentation (cont’d) Offsetting of cash accounts:  Offset bank overdrafts against cash account provided that overdraft is payable on demand. e.g. Assume that EEU has a checking account with CBE. It has also an overdraft facility up to ETB 20,000. At the end of the period, the checking account shows a debit balance of ETB 200,000 while overdraft account shows a credit balance of ETB 15,000. The overdraft is payable on CBE’s demand. How does EEU report these balances in the balance sheet? 20 Monday, November 18, 2024  Review questions 1) How do we measure cash? 2) Cash and cash equivalents in foreign currencies are initially translated at the exchange rate on the closing date (true/false) 3) As per International Financial Reporting Standards, offsetting cash accounts is strictly forbidden. (true/false) 21 Monday, November 18, 2024  Reporting  Movements of cash and cash equivalents during the period and disclosing the category they belong such as: - Cash at bank - Cash on hand - Short-term deposits  Reconciliation of the cash and cash equivalents in the statement of cash flow to the statement of financial position  Amount of cash subject to restrictions as at the end of the reporting period 22 Monday, November 18, 2024  Similarities and Difference between IFRS & US GAAP in relation to Cash  SIMILARITY & Cash Equivalents  According to both standards, cash includes cash on hand & demand deposits.  IAS 7 define cash equivalents as;  Short-term highly liquid investments that are readily convertible to known amounts of cash which mature within 90 days & are subject to insignificant risks.  The definition under US GAAP is similar! 23 Monday, November 18, 2024  Similarities and Difference b/n IFRS & DIFFERENCE GAAP (Continued)  US GAAP does not offset bank overdrafts against the cash account  IFRS includes bank overdrafts in the cash & cash equivalents category if they are repayable on demand & form an integral part of an entity’s cash management.  When there is cash available in another account in the same bank on which the overdraft occurred offsetting against the cash account is required! 24 Monday, November 18, 2024  TRADE & OTHER RECEIVABLES Monday, November 18, 2024 25  Applicable Standards  IFRS15 – Revenues,  IAS 32 – Financial Instruments – Presentation  IFRS 9– Financial Instruments – Recognition & Measurement 26 Monday, November 18, 2024  What is receivable? Receivables Are asset designations applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Form part of financial assets under the category “Loans and Receivables”. 27 Monday, November 18, 2024  What is receivable?(Continued)  Loans and receivables are:  Non-derivate financial asset with fixed or determinable payments; - that are not quoted in an active market & 28 Monday, November 18, 2024  Classification of Receivables Receivables could be classified in to trade and non-trade Originated Trade by the Receivabl Receivable entity es s Non- Held for trade trading Could you mention examples of trade receivables? What about non-trade? 29 Monday, November 18, 2024  Scope and Exclusions  Trade & other receivables include the following:  Bills receivables;  Staff advances and prepayments;  Government Receivables (VAT & other taxes and dues relating to operations)  A/R on special transactions with government, public bodies & international organizations; 30 Monday, November 18, 2024  Scope and Exclusions (Continued)  A/R from associate undertakings (current accounts or capital-account transactions, etc.);  A/R on disposals of fixed assets and marketable securities;  Accrued interest on loans & receivables (whether relating to investments or otherwise).  Other A/R (including accrued income); 31 Monday, November 18, 2024  Scope and Exclusions (Continued)  Deductions  The following shall be deducted from Trade & Other Receivables:  Advances & prepayments received from customers;  Rebates (refunds);  Discounts;  A/P on packaging, containers & materials on which deposits are charged. 32 Monday, November 18, 2024  Recognition A trade receivable arises upon fulfillment of the conditions required for revenue recognition of a sale of goods and services ( IFRS 15). 33 Monday, November 18, 2024  Measurement  The measurement rules to be applied depend on the classification of the receivable as:  “originated by the entity” or  “held for trading”. Business Model  Held for trading: A receivable shall be classified as held for trading if it is incurred principally for the purpose of selling or repurchasing it in the near term through factoring, securitization etc.  Originated by the entity: Receivables originated by the entity are all receivables other than those that are originated with the intention of sale immediately or in the short term. 34 Monday, November 18, 2024  Measurement (cont’d) Measurement Methods (IFRS 9) 1. Amortized cost 2. Fair value through profit or loss 35 Monday, November 18, 2024  Measurement (cont’d) Measurement Methods: Amortized cost  As per IFRS 9, a FA shall be measured at amortized cost if both of the following conditions are met:  The asset is held within a business model whose objective is to hold assets in order to collect contractual Cash flows  The contractual terms of the financial asset give rise on specified dates to 36 Monday, November 18, 2024  Measurement (cont’d) Measurement Methods: Fair value  Financial assets which do not fulfill both of the above conditions are valued at fair value i.e.  a Financial asset is measured at fair value unless it is measured at amortized cost 37 Monday, November 18, 2024  Measurement (cont’d) Example 1: Identify whether each of the following cases require the classification of receivables as held for trading or held to collect contractual cash flows: a. An entity holds loans and advances to customers to collect their contractual cash flows but would sell an investment in particular circumstances, perhaps to fund unforeseen cash shortage. Held to collect & trade. b. An entity’s business model is to purchase portfolios of financial assets, such as loans. Those portfolios may or may not include financial assets with incurred credit losses. If payment on the loans is not made on a timely basis, the entity attempts to extract the contractual cash flows through various means – for example, by contacting the debtor through mail, telephone, and so on. Held to collect. c. ABC Co. has a business model with the objective of buying and 38 reselling loans and advances from various Monday, financial November 18,institutions 2024  Measurement (cont’d) Non- discounted Initial value measuremen t Discounted value Measuremen t timing Amortized Subsequent cost measuremen t Fair value 39 Monday, November 18, 2024  Measurement (cont’d) Initial Measurement: Initial measurement rules detailed below are applicable to both receivables “originated by the entity” and “held for trading”.  When a receivable is recognized initially, the Company shall measure it at its cost, which is its nominal value, including VAT and other similar taxes.  When the effect of the passage of time is not significant, receivables are measured on an undiscounted basis (which is the most common case).  When the effect of the passage of time is significant, receivables are initially measured on a discounted 40 Monday, November 18, 2024  Measurement (cont’d) Subsequent Measurement a) Receivables originated by the entity  Initially recognized at cost: = Nominal value - impairment or uncollectability  Initially measured at discounted value: = Carrying amount + discount accumulation – impairments /uncollectibility b) Receivables held for trading  Measured at fair value 41 Monday, November 18, 2024  Measurement (cont’d) Example 2: On 1st February 2015, Lion International Bank provided working capital loan amounting Br 2m to its customers (borrowers) in anticipation that the bank will collect the loan after one year (31 January 2016). The fiscal year ends on June 30. Assume none of this loan was repaid by 30 June 2016. There is no collateral for the loan, except good credit history. a) Identify whether this loan is accounted for using amortized cost or fair value. b) What was the value at which the loan should be recorded on 1st of February 2015? c) What was the value at which the loan should be reported on 30 June 2015 assuming that there was no impairments during 2015. 42 Monday, November 18, 2024  Measurement (cont’d) a) Identify whether this loan is accounted for using amortized cost or fair value.  Amortized cost because it is originated by LIB and expected to be received in cash from the borrower b) What was the value at which the loan receivable should be recorded on 1st of July 2015?  ETB 2m c) What was the value at which the loan should be reported on 30 June 2015 assuming that there was no impairments during 2015.  ETB 2m 43 Monday, November 18, 2024  Measurement (cont’d) d) At what value should the loan receivable recorded as of 30 June 2016? Loan loss provision = 2,000,000 * 20% = 400,000 Net loan receivable = 2,000,000 – 400,000 = 1,600,000 The entry to record the provision would be: Bad debt expense ………. 400,000 Allowance for doubtful debts …. 400,000 44 Monday, November 18, 2024  Measurement (Continued)  Subsequent Measurement (Continued) 3. Receivables in Foreign Currencies  Are translated at the exchange rate of the date of the operation.  Are restated at closing date using the closing date exchange rate, and  the resulting exchange d/c is included in the PL, in accordance with effects of changes in foreign exchange rates. 45 Monday, November 18, 2024  Reporting and disclosure (Continued)  As stated in “IFRS 7”, the following disclosures are made with regard to receivables:  Movements in the balances of Account Receivables  Allowances for doubtful accounts & all movements during the year!  Receivables which are pledged or otherwise restricted at the end of the reporting period  Age analysis of receivables  Receivables that are transferred  Other relevant disclosures under financial instruments. 46 Monday, November 18, 2024  The end of THE END chapter -3 Thank You! Monday, November 18, 2024 47