Chapter 7 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.

I. Cash and other Financial Assets

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 entitys own equity instruments.

Categories of Financial Assets

a. Financial asset at fair value through surplus or deficit
b. Held-to-maturity investments
c. Loans and receivables
d. Available-for-sale financial assets

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.

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. Otherwise, it is recognized at fair value plus transaction costs that are
directly attributable to the acquisition, issue or disposal of the financial asset.

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 (measured at amortized cost using the
effective interest method)
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 (measured at cost)

Impairment of Financial Assets

Impairment Loss = CV of the asset - PV of est. future CF disctd. at the financial assets original
effective interest rate.
The carrying amount of the asset shall be reduced:
 a. directly; or
b. using an allowance account
The amount of the loss shall be recognized in surplus or deficit.

Derecognition of Financial Assets

An entity shall derecognize a financial asset when, and only when:
a. The contractual rights to the cash flows from the financial asset expire or are waived; or
b. The entity transfers the financial assets provided the following conditions exist:
1. The entity transfers substantially all the risks and rewards of ownership of the financial
assets
2. The entity has not retained control over the financial assets.

II. Financial Liability

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 entitys own equity instruments.

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.

Initial Measurement of Financial Liabilities

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.

Subsequent Measurement of Financial Liabilities

An entity shall measure a financial liability at amortized cost using the effective interest method.
Amortized cost = Initial value Principal pmts. +/- Cum. Amortn Impairment Loss/Uncollectible

III. Equity Instrument

Equity instrument any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities.

Presentation of Financial Instruments

The instrument, or its component parts, on initial recognition as a financial asset, a financial
liability or an equity instrument shall be classified in accordance with the substance of the
 contractual arrangement and the definitions of a financial asset, a financial liability and an equity
instrument.

Forms and Reports to be Prepared and Maintained

The following schedules and forms shall be prepared and maintained by the agencies relative to
their financial instruments accounts:
a. To be prepared by all National Government Agencies
1. Schedule of Accounts Payable
2. Schedule of Accounts Receivable
3. Registry of Accounts Written-Off
b. The BTr shall maintain records on loan availments and repayments, grant availments and
utilization, and guaranteed loans using its computerized application.

IV. Derivatives

Derivative 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.

V. Hedging

Hedging a method of offsetting a potential financial loss or the structuring of a transaction

to reduce risk involving financial instruments.
Hedge accounting recognizes the offsetting effects on surplus or deficit of changes in the fair
values of the hedging instrument and the hedged item.

3 types of hedging relationships

1. Fair value hedge
2. Cash flow hedge
3. Hedge of a net investment in a foreign corporation

2 Components of Hedging
1. Hedging Instrument a designated derivative or a designated non-derivative financial asset
or non-derivative financial liability whose fair value or cash flows are expected to offset
changes in the fair value or cash flows of designated hedged item.
2. Hedged Item an asset, liability, firm commitment, highly probable forecast transaction or
net investment in a foreign operation that (a) exposes that entity to risk of changes in fair
value or future cash flows and (b) is designated as being hedged.

Chapter 8 Inventories

Inventories assets in the form of materials or supplies to be consumed in the production

process or distributed in the rendering of services.
 Cost of Inventories
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition

Measurement
Inventories shall be measured as follows:
a. At the lower of cost and net realizable value
b. At the lower of cost and current replacement cost; or
c. In accordance with PPSAS 27, inventories comprising agricultural produce shall be measured
on initial recognition at their fair value less costs to sell at the point of harvest.

Cost Formulas
The cost of inventories of items that are not ordinarily interchangeable, and goods or services
produced and segregated for specific projects, shall be assigned by using the specific
identification of their individual costs.
For interchangeable items, cost is determined using the weighted average cost formula.

Weighted Average Method

This method calls for the re-calculation of the average cost of all items in stock after every
purchase.
WA = Total Cost divided by Total No. of Units Available
The Accounting Division/Unit shall be responsible in computing the cost of inventory on a
regular basis as shown in the Supplies Ledger Card (SLC).

Recognition as an Expense
When inventories are sold, exchanged, or distributed, their carrying amount shall be recognized
as an expense in the period in which the related revenue is recognized. If there is no related
revenue, the expense is recognized when the goods are distributed or the related service is
rendered.
 Impairment
An asset is said to be impaired if the cost of inventories held for sale is higher than the net
realizable value or the cost of inventories held for distribution or consumption is higher than the
current replacement cost.

Perpetual Inventory Method

Supplies and materials purchased for inventory purpose shall be recorded using the perpetual
inventory system, resulting in a more accurate inventory records and a running total for the cost
of goods sold in each period.

Inventory Accounting System

The Inventory Accounting System consists of the system of monitoring, controlling and recording
of acquisition and disposal of inventory.
The sub-systems for inventory accounting are as follows:
a. Receipt, Inspection, Acceptance and Recording Deliveries of Inventory Items
b. Requisition and Issue of Inventory Items
c. Transfer and/or Disposal of Inventory Items

Records, Forms and Reports to be prepared and/or maintained

Stock Card (SC)
Supplies Ledger Card (SLC)
Requisition and Issue Slip (RIS)
Purchase Request (PR)
Purchase Order (PO)
Report of Supplies and Materials Issued (RSMI)
Waste Materials Report (WMR)
Report on the Physical Count of Inventories (RPCI)
Inspection and Acceptance Report (IAR)
Report of Accountability for Accountable Forms (RAAF)
Inventory Custodian Slip (ICS)

Chapter 9 Investment Property

Measurement at Initial Recognition

IP shall be measured initially at its cost. Transaction costs shall be included in this initial
measurement.

Mode of Acquisition of Investment Property

1. Cash Purchase
2. Non-exchange Transaction
3. Self-constructed Property
4. Installment Payment

Measurement after Recognition

 After initial recognition, an entity shall use the cost model (cost less any accumulated
depreciation and any accumulated impairment losses) as its accounting policy and this shall be
applied to all of its investment property.

Transfers To or From Investment Property

Transfers to or from IP shall be made when, and only when, there is a change in use, as
evidenced by the following:
a. Commencement of owner-occupation, for a transfer from IP to owner-occupied property;
b. Commencement of development with a view to sale, for a transfer from IP to inventories;
c. End of owner-occupation, for a transfer from owner-occupied property to IP; or
d. Commencement of an operating lease (on a commercial basis) to another party, for a transfer
from inventories to IP.

Derecognition of Investment Property

An IP shall be derecognized on disposal or when the IP is permanently withdrawn from use and
no future economic benefits or service potential is expected from its disposal.
Gains or losses from the retirement/disposal of IP = net disposal proceeds carrying amount of
the asset
It shall be recognized in surplus or deficit in the period of the retirement or disposal.

Impairment of Investment Property

An asset is said to be impaired when its carrying amount in the SFP exceeds its recoverable
amount due to fall in market value of an asset.
Impairment Loss = Carrying Amount less Recoverable Amount
Carrying amount =Cost less Accumulated Depreciation and Accumulated Impairment Loss
Recoverable Amount = Higher of Fair Value less Cost to sell and Value in Use
Value in Use = Present Value of the Assets estimated future cash flows
If it is not possible to estimate the recoverable amount of the individual asset, an entity shall
determine the recoverable amount of the cash-generating unit to which the asset belongs (the
assets cash-generating unit). An impairment loss shall be recognized for a cash-generating unit
if, and only if, the recoverable amount of the unit is less than the carrying amount of the unit.
In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset
below the highest of:
1. Its fair value less costs to sell (if determinable);
2. Its value in use (if determinable); and
3. Zero.

Reversal of Impairment Loss

An entity shall assess whether there is any indication that an impairment loss recognized in prior
periods for an asset may no longer exist or may have decreased. If such indication exists, the
entity shall estimate the recoverable amount of that asset.
 Accounting Records to be Prepared and Maintained
The Accounting Division/Unit shall record promptly the acquisition, description, estimated life,
depreciation, impairment loss, disposal, and other information for each class of IP in the
Investment Property Ledger Card (IPLC).