IA1 C1: CCE (Nature of Financial Assets - Presentation and Measurement of Cash in the SFP)

Financial instrument

any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity

Financial asset

From the holder’s POV, the instrument is a _________

Financial liability or a component of shareholder’s equity

From the issuer’s POV, the instrument is a _________

Financial asset

It arises from a contract that entitles the holder to receive cash or another financial asset

Examples of financial assets

• Cash and cash equivalents

• Investments in equity instruments of other entities

• Contractual rights to receive from another entity cash or another financial asset (trade receivables, loans and other receivables)

• Investments in debt instruments of another entity classified by the latter entity as financial liabilities (investments in bonds and commercial papers)

Derivative

Financial assets also include _______ held by an entity.

Derivative

a financial instrument that meets all of the following characteristics:

• its value changes in response to change in specified interest rate, commodity price, financial instrument price, foreign exchange rate, price index, credit rating or credit index, or other variables

• it requires no initial net investment, or initial investment smaller than that required in similar contracts

• its settled at a future date

Recognize

IFRS 9 provides that an entity shall ________ a financial asset in its statement of financial position when and only when the entity becomes a party to the contractual provisions of the instrument,

Enforeceable right

The entity recognizing the financial asset has the _______ to the inflow of economic benefits from the instrument, as this inflow is embodied in the agreement with the other entity

Cash

considered by most financial statement users as one of the most significant. It is most often the first asset item listed on the face of the statement of financial position

Cash

any item that is used as standard medium of exchange

Cash

From a limited viewpoint, it refers to currency and coins that are in circulation

Face value

For accounting purposes, an item is considered “Cash” if it is acceptable by bank or another financial institutions for deposit at ____________

Examples of cash

• Bills and coins on hand

• Demand credit instruments (checks, bank drafts, postal money orders and currency demand deposits with banks)

Unrestricted and available

To qualify for reporting, a cash item must be _________ and must be immediately ______ for use in current operations

Cash in the current asset section

If the cash item is unrestricted and immediately available for use in current operations then it is classified as _______

Current asset other than cash

If the cash item is restricted and is for use in current operations then it is classified as ________

Non-current asset

If the cash item is restricted and is not for use in current operations then it is classified as ________

on hand

Cash items are unrestricted if they are _______

Withdrawn immediately

Cash items are unrestricted if in the case of deposits with banks, they can be _______

Receivable

Cash deposits that have been restricted because of an unforeseen circumstance must be reclassified as ____________

Parallel

The presentation of the cash item must ________ the intention of the management for which cash is held.

Qualify

Cash funds that are intended for current operations are _________ to be reported as cash in the current asset section of the statement of financial position.

Examples of cash funds that are intended for current operations

• Payroll fund

• Working fund

• Change fund

• Petty Cash Fund

• Interest Fund

• Dividend Fund

Not qualify

Cash funds that are intended for acquisition of non-current assets do _________ to be reported as part of current assets.

Other descriptive account titles

The cash funds that are intended for acquisition of non-current assets are presented using ____________

Example of account titles used for cash funds that are intended for acquisition of non-current

• Plant expansion fund

• Equipment acquisition fund

Not qualify

Cash funds that are intended for settlement of long-term obligations in the future do _________ to be reported as part of current assets.

Current asset

If the long-term obligation or a portion thereof becomes due within 12 months after the end of the reporting period set aside for its liquidation shall be classified as _____

Cash on hand, cash in bank

Account titles used for “Cash” in the statement of financial position.

Undeposited cash collections, working funds

This two are under cash on hand

Undeposited cash collections

Under cash on hand wherein it composed of currencies such as

• bills and coins

• customers’ checks

• traveler’s checks

• manager’s checks

• cashier’s checks

• bank drafts

• money orders

Working funds

Under cash on hand wherein cash funds segregated for current use in the ordinary conduct of business

• petty cash fund

• change fund

• payroll fund

• dividend fund

• tax fund

• interest fund

Cash in bank

Another account title used for “Cash” in the statement of financial position wherein it includes demand deposits.

They are unrestricted funds deposited in a bank that can be withdrawn upon demand such as amounts in the checking and savings account.

Short-term commercial papers and money market instruments

These are instruments that an enterprise may hold (e.g. short-term trust funds held in banks and Philippine treasury bills) that could be converted into cash within a relatively short period of time.

Higher

Short-term commercial papers and money market instruments may also maintain time deposits with banks that earn interest at a rate ________ than the rate on the savings deposit.

Cash equivalents

These highly liquid financial instruments that are so near their maturity and that there is insignificant risk of change in value due to fluctuation of interest are known as _______

Accounting policy

An enterprise sets its own _____________ to determine which financial qualified as cash equivalents.

Cash equivalent

A financial instrument qualify as ________ if it matures within a short period of time.

3 months or less

Cash equivalent normally matures ____________, from the date of acquisition.

Date of acquisition

Regardless of management’s policy, the determination of the maturity date starts from the instrument’s _____________ and not from the date indicated on the face of the instrument.

Qualify

Example of Nature and Composition of cash Equivalents:

ABC Company adopt the policy to treat as cash equivalents debt instruments with maturity of not more than 90 days from the date of acquisition.

On December 15, 2020, treasury bills were purchased which are maturing on or before March 15, 2021 ________ to be reported as cash equivalents in the company’s December 31, 2020 statement of financial position

Not qualify

Example of Nature and Composition of cash Equivalents:

ABC Company adopt the policy to treat as cash equivalents debt instruments with maturity of not more than 90 days from the date of acquisition.

On July 15, 2020, treasury bills were purchased and maturing on January 15, 2021 would _________ as cash equivalents in the company’s December 31, 2020 statement of financial position, even if they are maturing in only 15 days from reporting date, because the instruments have a remaining term of 6 months from the date of acquisition.

Temporary investments

These are investments in equity shares that are generally not included as part of cash equivalents because these equity securities do not have maturity dates.

Profit or loss, comprehensive income

Temporary investments are classified as either as equity investments at fair value through ____________ or equity investments at fair value through ________________.

Cash and cash equivalents

Although cash equivalents are not cash, they are generally presented in the statement of financial position together with cash using the account title _____________

Amortized cost and fair value

Cash is generally measured at face value, which is its ___________________ at the same time.

Exchange rate

Cash deposits denominated in foreign currency are measured using the _______________ in effect at the end of the reporting period.

1. Foreign currency

2. Cash in closed banks or in banks having financial difficulty or in bankruptcy

3. Customers’ post-dated checks , NSF checks and IOUs

4. Postage stamps and expense advances

5. bank overdraft

6. Undelivered or unreleased checks

7. Company’s postdated check

8. Compensating balances

9. Cash set aside for long-term specific purpose or for acquisition of a non-current asset

Considerations in reporting cash balance in the statement of financial position

Foreign currency

Considerations in reporting cash balance in the statement of financial position:

Cash in foreign currency and deposits in foreign banks which are subject to immediate and unrestricted withdrawal, should be translated to Philippine currency using the exchange rate at the end of the reporting period.

Cash in foreign banks that are restricted as to use or withdrawal should be reported separately.

Cash in closed banks or in banks having financial difficulty or in bankruptcy

Considerations in reporting cash balance in the statement of financial position:

_______ should be reclassified as receivable and should be written down its recoverable amount.

Customers’ post-dated checks , NSF checks and IOUs

Considerations in reporting cash balance in the statement of financial position:

No sufficient fund checks are those that cannot be covered by funds in the debtor’s bank account, and “I owe you” notes should be reported as receivables rather than cash.

DAIF or DAUD checks

NSF checks in the Philippines, are oftentimes described as ___________

Drawn against insufficient funds

DAIF check stands for ___________

Drawn against unclear deposits

DAUD check stands for ________

Postage stamps and expense advances

Considerations in reporting cash balance in the statement of financial position:

__________, such as advances for employees’ travel, are not cash, but are reported as prepaid expenses in the current asset section

Liability

A bank overdraft that cannot be offset against another account is reported as a _________

Bank overdraft

Considerations in reporting cash balance in the statement of financial position:

A _________ occurs when a depositor has written checks for a sum greater than the amount in the depositor’s bank account, resulting in a credit balance in that cash account.

Cash

A bank overdraft may be offset against a positive balance in another bank account with the same bank if a right of offset exists between the bank and the depositor. In such a case, the depositor reports the net positive amount as __________

Cash

Bank Overdraft

For instance, an enterprise maintains an account with Bank A and another account with Bank B. If, at the end of the reporting period, the account with Bank A has a positive balance and the account with Bank B is overdrawn (credit balance), the cash balance with Bank A is reported as ________

Liability

Bank Overdraft

For instance, an enterprise maintains an account with Bank A and another account with Bank B. If, at the end of the reporting period, the account with Bank A has a positive balance and the account with Bank B is overdrawn (credit balance), the cash balance with Bank B is reported as ________

Cash

Bank Overdraft

On the other hand, assume that an enterprise maintains both a general account and a payroll account with Bank A. At year-end, the general account has a positive balance while the payroll account is overdrawn. The overdrawn account can be offset against the cash balance in the general account, as normally there exists a right of offset within the same bank. If the net amount represents an excess of cash balance over the credit balance, it is shown as _______

Liability

Bank Overdraft

On the other hand, assume that an enterprise maintains both a general account and a payroll account with Bank A. At year-end, the general account has a positive balance while the payroll account is overdrawn. The overdrawn account can be offset against the cash balance in the general account, as normally there exists a right of offset within the same bank. If the net amount represents an excess of overdrawn account over the credit balance, it is shown as _______

Undelivered or unreleased checks

Considerations in reporting cash balance in the statement of financial position:

__________ are the company’s checks drawn and recorded as disbursed but are not actually issued or delivered to the payees as of the reporting date.

Current payables

Undelivered or unreleased checks

Technically, checks drawn by a company should not be deducted from the company’s cash balance until they have been mailed or otherwise delivered. Therefore, these checks should be reverted to the cash balance. As a result, liabilities that the checks are intended to liquidate still exist and should be reported as _______________.

Company’s postdated check

Considerations in reporting cash balance in the statement of financial position:

_________, which has been recorded as issued and delivered to payee before or at the end of the reporting period should be reverted to cash and the corresponding liability shall be recognized, because there is no actual payment yet, as of that date. Such a check cannot possibly clear with the bank until the date indicated in the check.

Compensating balances

Considerations in reporting cash balance in the statement of financial position:

__________ are minimum amounts that a company agrees to maintain in a bank checking account as support or collateral for a loan by the depositor.

Cash

When the compensating balance is not legally restricted as to withdrawal by the depositor and the loan for which it is used as a collateral is a short-term loan, the amount is reported as part of __________. The nature of the arrangement is disclosed in the notes to financial statements

Current asset or non-current asset

A compensating balance that is legally restricted should be classified separately either as _________________ depending on the nature of the loan for which the compensating balance is set up.

Cash set aside for long-term specific purpose or for acquisition of a non-current asset

Considerations in reporting cash balance in the statement of financial position:

_________________, such as bond sinking fund and plant expansion fund, is reported as non-current financial asset.