Government Accounting

&
Accounting for non-profit organizations

by: ZEUS VERNON B. MILLAN

 Chapter 6
Financial Assets

Learning Objectives
1. Define a financial asset and give
examples.
2. Account for cash and cash equivalents.
3. Account for receivables.
4. Account for investments.

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Definitions
• 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. (PPSAS 28.9)

• Financial asset – is any asset that is:

a. Cash;
b. An equity instrument of another entity;
c. A contractual right to receive cash or another financial
asset from another entity;
d. A contractual right to exchange financial instruments
with another entity under conditions that are
potentially favorable; or
e. A contract that will or may be settled in the entity’s
own equity instruments.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
 Examples of Financial Assets
• Cash and Cash equivalents
• Receivables
• Investments in equity and debt securities
• Derivative assets

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Initial Recognition
• A financial asset is recognized when an
entity becomes a party to the contractual
provisions of the instrument. (PPSAS 29.16)

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Initial Measurement
• Financial assets are initially measured at
fair value plus transaction costs, except for
financial assets at fair value through
surplus or deficit whose transaction costs
are expensed.

• Transaction costs are incremental costs that

are directly attributable to the acquisition,
issue, or disposal of a financial instrument.

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Cash
• Cash – comprises cash on hand, cash in
bank and cash treasury accounts.

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Unreleased & Cancelled Checks
• Unreleased checks are reverted back to cash.
Cash in Bank, Local Currency-Current xx
xx
Accounts Payable (or other liability
account)
• Cancelled checks (e.g., stale, voided or spoiled) are
reverted back to cash.
The cancelled check pertains to:
Current year Prior period
Cash-Modified Disbursement Accumulated Surplus/
System (MDS), Regular xx (Deficit) xx
Accounts payable xx
Accounts payable xx
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
 Petty Cash Fund
• The Petty Cash Fund of a government entity
is:
– maintained using the imprest system.
– sufficient to defray recurring petty
expenses for 1 month.
– used for disbursements not exceeding
₱15,000 per transaction.
– replenished as soon as disbursements
reach at least 75% or as needed.

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
Accounting for Cash Shortage/Overage
• The disbursing officer is liable for any cash
shortage while any cash overage that he
cannot satisfactorily explain to the auditor
is forfeited in favor of the government.
• Shortage:
Due from Officers and Employees xx
xx
Advances for/to..(Appropriate
account)
• Overage:
Cash – Collecting Officers xx
Miscellaneous Income xx

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Dishonored Checks
• A dishonored check is a check that is not
accepted when presented for payment,
e.g., a check returned by the bank because
of lack of sufficient funds - ‘bounced’ check.
• Dishonored checks are recorded in the
“Other Receivables” account.

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Bank Reconciliation
• A government entity prepares monthly
bank reconciliations for each of the bank
accounts it maintains, using the adjusted
balance method.

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Cash Equivalents
• Only debt instruments acquired within 3
months before their scheduled maturity
date can qualify as cash equivalents.

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Z.B.Millan
 Receivables
• Receivables are initially measured at fair
value plus transaction costs and
subsequently measured at amortized cost.

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Z.B.Millan
 Categories of Financial Assets
Type of Initial Subsequent
Examples
Financial Asset Measurement Measurement
a. Financial asset  Investments in Fair value Fair value; changes
at fair value quoted stocks or in FV are recognized
through surplus bonds. in surplus/deficit
or deficit
b. Held-to-  Investments in Fair value plus Amortized cost
maturity bonds and other transaction costs
debt securities
to be held until
maturity

c. Loans and  Accounts, Notes, Fair value plus Amortized cost

receivables Loans receivable transaction costs

d. Available-for-  Investments in Fair value plus Fair value; changes

sale financial stocks or bonds transaction costs in FV are recognized
assets not classified in equity
under (a) to (c)
above.GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
 Derivatives
• A derivative is a financial instrument or
other contract that derives its value from
the changes in value of some other
underlying asset or other instrument.
• Characteristics of a derivative:
1. Its value changes in response to the
change in an underlying;
2. It requires no initial net investment (or
only a very minimal initial net
investment); and
3. It is settled at a future date.

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 Purpose of a derivative
• The very purpose of derivatives is risk
management.
• Risk management is the process of
identifying the desired level of risk,
identifying the actual level of risk and
altering the latter to equal the former.

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 APPLICATION OF CONCEPTS

PROBLEM 6-4: FOR CLASSROOM DISCUSSION

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Z.B.Millan
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

GOVT ACCTG & ACCTG FOR NPOs by:

Z.B.Millan
 END

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan