GOVERNMENT ACCOUNTING MANUAL

(For National Government Agencies)

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 1 of 37

 Session 7
Applying Accounting
Policies on Financial
Instruments
(with effects of changes in foreign
exchange rates & borrowing costs)

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 2 of 37

 Session Overview
Recognition, measurement and
presentation and disclosure
requirements of Financial Instruments;
Effects of Changes in Foreign Exchange
Rates to Financial Instruments, and;
Borrowing Costs incurred in connection
with Financial Instruments.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 3 of 37

 Learning Objective

At the end of the session:

you will be able to apply the
accounting policies on Financial
Instruments in accordance with the
provisions in the GAM.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 4 of 37

 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.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 5 of 37

 Characteristics of a Financial
Instrument
financial
asset of
one party
There must With at and
be a least two financial
contract parties liability or
equity
instrument
of another

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 6 of 37

 Slide 7 of 37 Session 7: Applying Accounting Policies on Financial GAM: Accounting
Cash
An equity instrument of
another entity.
Asset
A contractual right
al
A contract that will or
maybe settled in the
Financi
entitys own equity
instrument
Financial Asset
 Financial Assets

Trade Account Receivable

Loans Receivable

Bonds Receivable

Trading Securities

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 8 of 37

 Slide 9 of 37 Session 7: Applying Accounting Policies on Financial GAM: Accounting
instrument
equity
entitys own
settled in the
maybe
that will or
To deliver cash or another financial
A contract
asset to another entity obligation :
To exchange financial assets or
financial liabilities with another entity
A contractual
under conditions that are potentially
unfavourable to the entity
Financial Liability
 Financial Liabilities
Accounts payable

Treasury Bills Payable

Notes Payable

Loans Payable-Domestic/Foreign
Bonds Payable-Domestic/Foreign

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 10 of 37

 EQUITY INSTRUMENT

A contract that evidences a

residual interest in the assets of
an entity after deducting all of its
liabilities.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 11 of 37

 Equity Instrument

Ordinary Share

Preferred Share

Other Share Capital

BSP commercial papers and preference share with
mandatory redemption date or is redeemable at the option
of the holder.
GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 12 of 37
 Foreign currency transactions

Transaction arising when an entity:

Buys or sells goods or services denominated in a foreign

currency;
Borrows or lends funds denominated in a foreign currency; or
Otherwise acquires or disposes of assets, or incurs or settles
liabilities, denominated in a foreign currency.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 13 of 37

 Exchange Rate
Exchange rate is
the ratio of
exchange for
two currencies

Spot
Exchange Closing
Rate Rate

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 14 of 37

 Borrowing costs

Interests and other

Benchm expenses incurred.
ark
Treatme Recognized as an expense in
nt the period in which they are
incurred.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 15 of 37

 Borrowing costs

Interest on bank overdrafts, short-term/long-

term borrowings

Amortization of discounts/premiums and

ancillary costs related to borrowings

Exchange differences from foreign currency

borrowings as adjustment to interest costs.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 16 of 37

 Accounting for Financial Assets

Criteria for Recognition

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.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 17 of 37

Slide 18 of 37 Session 7: Applying Accounting Policies on Financial GAM: Accounting
Financial asset
Loans andHeld-to- at fair value
Available-
receivable
maturity through
for-sale
s investments surplus or
deficit
Categories of Financial Assets
 Measurement of Financial Assets

I Financial Asset at
Fair
Fair Value Through
N Surplus or Deficit Value
I
T
I Financial Asset Fair Value
NOT at Fair Value +
A Through Surplus or Transacti
L Deficit on Cost

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 19 of 37

 Measurement of Financial Assets

S Financial
asset at fair
U value
Held-to-
maturity
Loans and Available-for-
through receivables sale
B surplus or
investments
S deficit

E
Q Measured at:
U Fair value with all
Measure at :
Measured at:
E gains and losses Amortized cost using the effective
interest method, less impairment
being recognized
N in surplus or losses Fair value

T deficit

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 20 of 37

 Derecognition and Transfer of Financial Assets

The contractual rights to the cash flows

from the financial asset expired or waived
Transferred substantially all the risks and
Derecogni
rewards of ownership and control over
the financial assets
ze

Transfers the contractual rights to receive

the cash flows of the financial asset
Retains the contractual rights to receive
Transfer
the cash flows of the financial asset

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 21 of 37

 PRESENTATION AND DISCLOSURE

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 22 of 37

 Criteria for Recognition

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.

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 23 of 37

 Measurement of Financial Liabilities

Financial Liability
I at Fair Value Fair
N Through Surplus or
Value
Deficit
I
T
I Financial Liability Fair Value
NOT at Fair Value +
A Through Surplus or Transacti
L Deficit on Cost

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 24 of 37

 Transaction costs:
Fees and commissions paid to
agents, advisers, brokers and
dealers
Levies by regulatory
agencies and securities
exchanges;

Transfer taxes and

duties
GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 25 of 37
 Illustrative Example
Face value of the bond P100,000.00
Term 5-years
Selling price 95,787.63
Issue Date 1-Jan-15
Nominal Rate 5% annually
Effective interest rate 6%
BOND ISSUE COST P34,000.00

Face value of the bond P100,00.00

Selling price 95,787.63
Discount on Bonds Payable
P 4,212.37

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 26 of 37

 Entry to record Bond Issue
Cost:
Account
Account Title Code Debit Credit

Bond Issue Cost-Domestic 20102023 34,000

Cash in Bank- LC, BSP 10102010 34,000

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 27 of 37

 Subsequent Measurement

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 28 of 37

 Illustrative Example
Face value of the bond P100,000.00
Term 5-years
Selling price 95,787.63
Issue Date 1-Jan-15
Nominal Rate 5% annually
Effective interest rate 6%

Face value of the bond P100,00.00

Selling price 95,787.63
Discount on Bonds Payable
P 4,212.37

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 29 of 37

 Illustrative Example

Journal Entries:

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 30 of 37

 Schedule of Amortization
Date Interest Interest Amort. Of Debit Credit Book Value
Expense Expense Bond Balance of Balance of of the
(5% of (6% of BV) Discount Bond Bonds Bonds (F-
FV) (C-B) Discount Payable E)

Jan. 01. 2015 4,212.37 100,000.00 95,787.63

Dec. 31 2015 5,000.00 5.747.26 747.26 3,465.11 100,000.00 96,534.89
Dec. 31 2016 5,000.00 5,792.09 792.09 2,673.02 100,000.00 97,326.98
Dec. 31 2017 5,000.00 5,839.62 839.62 1,833.40 100,000.00 98,166.60
Dec. 31 2018 5,000.00 5,890.00 890.00 943.40 100,000.00 99,056.60
Dec. 31 2019 5,000.00 5,943.40 943.40 - 100,000.00 100,000.00

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 31 of 37

 The amortized cost of the bonds payable on December 31, 2015

Credit balance of Bonds payable P100,000.00

Debit balance of bond discount (3,465.11)
Amortized cost ( Dec. 31, 2015) P96,534.89

Or
Book Value of the Bonds (Jan. 1, 2015) P95,787.63
Amortization of Bond discount 747.26
Amortized cost (Dec. 31, 2015) P96,534.89

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 32 of 37

 Equity Instruments

Equity security encompasses any

instrument representing
ownership shares and right,
warrants or options to acquire or
dispose of ownership shares at a
fixed or determinable price
GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 33 of 37
GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 34 of 37
 Summary

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 35 of 37

 Summary

Financial Equity

is any contract that Ordinary/Preferred and

evidences a other share capital;
residual interest Commercial papers
and preference share ;
the assets of an BSP treasury bills;
entity after treasury bills and
deducting all of its treasury notes issued
liabilities by the BTr;
GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 36 of 37
 THANK YOU!

GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 37 of 37