FINANCIAL ASSETS

Financial Instruments – is any contract that gives rise to both a financial asset of one entity and financial
liability or equity instrument of another entity. (PPSAS28.9)

Financial Asset – is any asset that is:

 Cash
 Equity instrument of another entity
 A contractual right to receive cash or another financial asset from another entity;
 A contractual right to exchange financial instruments with another entity under conditions that
are potentially favorable or,
 A contract that will or may be settled in the entity’s own equity instruments

Financial Liability – is any liability that is:

 A contractual obligation to deliver cash or another financial asset to another entity

 A contractual obligation to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavorable to the entity; or,
 A contract that will or may be settled in the entity’s own equity instruments.

Equity Instruments – is a contract that evidences a residual interest in assets of an entity after
deducting all of its liabilities.

NOTES:

 Cash is the most basic financial instrument because it is the medium of exchange and the basis
of measurement of all financial statement elements.
 A financial asset is recognized when the entity becomes a party to the contractual provisions of
the instruments. (PPSAS29.16)
 Financial assets are initially measured at fair value plus transaction cost, except for financial
assets at fair value through the surplus or deficit whose transaction cost are expensed.
 A transaction cost are incremental cost that are directly attributable to the acquisition, issue, or
disposal of a financial instrument.

 Financial instruments are subdivided into the following

 CASH AND CASH EQUIVALENTS
 RECEIVABLES
 INVESTMENTS
 DERIVATIVES
CASH AND CASH EQUIVALENTS

Cash – comprises cash on hand, cash in bank and cash treasury accounts.

Adjustment for Unreleased Commercial checks

 Unreleased checks are checks drawn but not yet given to the payees as of the end of the period.
 Unreleased checks are not physically cancelled. At the start of the following year, the adjusting
entry below is reversed to recognize the availability of the checks for release. The procedure
does not apply to MDS account because there is no actual cash with the Government servicing
bank.
 Unreleased checks are reverted back to cash as follows:

Date Cash in Bank, Local currency current xx

Accounts Payable (or other liability account) xx

Accounting for Cancelled Checks

 Checks are cancelled when they became stale, voided or spoiled. A check is considered stale if it
has been outstanding for over 6 months from its date.
 Replacement of checks may be issued for cancelled checks that were already released to payees,
upon submission of the cancelled checks to the accounting unit.
 Cancelled checks are reverted back to cash as follows:

The Cancelled checks pertains to current Year

Date Cash-Modified Disbursement System (MDS, Regular Xx

Accounts Payable Xx

To recognize the cancellation of stale/voided/spoiled

MDS checks

The cancelled checks pertains to Prior Period

Date Accumulated Surplus (Deficit) Xx

Accounts Payable xx

To recognize the cancellation of stale/voided/spoiled

MDS Checks
Petty Cash Fund – refers to the amount granted to duly designated Petty Cash Fund Custodian for
payments of authorized petty cash or miscellaneous expenses which cannot be conveniently paid
through checks or ADA.(GAM for NGA’s Chapter6, sec 2)

GUIDELINES:

a. The Head of Agency shall approve the amount of PCF to be established, which shall be sufficient
to defray recurring petty expenses for 1 month.
b. The PCF Custodian shall be properly bonded whenever the establish amount of PCF exceeds
P5,000.
c. The PCF shall maintained using Imprest System.
d. The PCF shall be kept separately from other advances or collections and shall not be used to pay
for regular expenses such as rentals, electricity, water, etc.
e. The PCF payments shall not exceed P15000 for each transaction, except when otherwise
authorized by law or by the COA. Splitting of transactions is prohibited.
f. A canvass from at least 3 suppliers is required for the purchase amounting to P1000 and above,
except for the purchases made on official travel.
g. PCF disbursement shall be supported by properly accomplished and approved Petty Cash
Vouchers, invoices, OR’s, or other evidence of disbursements.
h. Replenishment shall be made as soon as disbursement reach at least 75% or as needed
i. At the end of the year the PCF custodian shall submit all unreplenished PCV to Accounting Unit
for recording in the books of accounts.
j. The unused balance of the PCF shall not be closed at year-end, It shall be close only upon
termination, separation, retirement, or dismissal of the PCF custodian.

EXAMPLE 1: After careful estimates of recurring monthly petty cash expenses, the Head of Entity A
approves the establishment of a P50,000 petty cash fund.

Date Petty Cash Fund 50,000

Cash Modified Disbursement System (MDS) Regular 50,000
To record the establishment of PCF

NOTES:

 No journal entries are made as disbursement are made out of the PCF. Journal entries will be
made when the PCF is
 Replenished or
 Adjusted at the end of the period for unreplenished expenses.
 The Disbursing officer is liable for any cash shortage while any cash overages that he cannot
satisfactory explain to the auditor is forfeited in favor of the government.
  The disbursing officer is liable for any cash shortage why any cash overage that he cannot
satisfactory explain to the auditor is forfeited in the favor of the government.

DISHONORED CHECKS:

o A dishonored check – is a check that is not accepted when presented for payment, a check is
returned by the bank because of lack of sufficient funds (bounced check)
o The drawer of the dishonored check is liable for the amount of the check and all penalties
resulting from the dishonor, without prejudice to his criminal liability for a bounced check.

GUIDELINE:

a. When a check is dishonored, the Collecting officer shall:

I. Issue a Notice of Dishonored check to the drawer and any endorser, and
II. Cancel the related OR

b. If the collecting officer fails to issue a notice, the dishonored check becomes his personal
liability. The drawer and any endorses not given the notice will be relieved from any liability.

c. A check refused by the drawee bank when presented within 90 days from its date is a prima
facie evidence that the drawer has a knowledge about the insufficiency of his funds, unless
drawer pays the check in full or makes arrangement with the drawee bank for the full payment
of the check within 6 banking days after receiving the notice of dishonor.

d. A dishonored check shall be settled by payment in cash or certified check. The dishonored check
shall not be returned to the payor unless he returns first the previous OR therefor

BANK RECONCILIATION:

o A bank reconciliation statement is a report that is prepared for the purpose of bringing the
balances of cash (a) per records and (b) per bank statement into agreement.

GUIDELINES:

a. Bank reconciliation shall prepared as internal control to ensure the correctness of cash records
and as deterrent to fraud.
 b. The Chief Accountant or designated staff shall prepare separate bank reconciliations for each
bank account maintained by the entity within 10 days from receipt of the monthly bank
statements.

c. The Adjusted Balance Method shall be used. Under this method, the unadjusted book and bank
balances are brought to an adjusted balance that is reported on the statement of Financial
Position.
d. Bank reconciliations shall be prepared in 4 copies to be submitted within 20 days from receipt of
bank statement to (a) COA Auditor, (b) Head of Agency, (c) Accounting Division, (d) and Bank if
necessary.
e. A Journal Entry Voucher shall be prepared to record any reconciling items.

CASH EQUIVALENTS

o Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amount of cash and which are subject to insignificant risk of changes in value.
o Only debt instruments acquired within 3 months before their scheduled maturity date can
qualify as cash equivalents.

RECEIVABLES

o Receivables represent claims for cash or other assets from other entities. (example : Accounts
Receivable, Notes Receivable, Loans Receivables and other receivables such as interest
receivable, due from employee/officers other NGA’s, lease receivable, dividends receivable, etc.)
o Receivables are initially measured at fair value plus transaction cost and subsequently measured
at amortized cost.

INVESTMENTS

o Financial assets are categorized as follows:

a. Financial Assets at fair value through surplus or deficit – is one that either:
I. Held-for-trading, or
II. Designated as at fair value through surplus or deficit on initial recognition. Any
financial asset can be classified in this category if its fair value can be reliably
measured.

b. Held-to-maturity investments – are non derivative financial assets with fixed or

determinable payments and fixed maturity that an entity has the positive intention and
ability to hold until maturity.
c. Loans and receivables – are non derivative financial assets with fixed or determinable
payments and are not quoted in an active market.

d. Available-for-sale financial assets – are non derivative financial assets that are designated as
available for sale or are not classifiable under other categories.
DERIVATIVES

o A derivatives is a financial instrument or other contract that derives its value from the changes
in value of some other underlying asset or other instrument.
 o The purpose of derivatives is risk management. It is the process of identifying the desired level
of risk, identifying the actual level of risk, and altering the latter to equal the former. (GAM for NGA’s
Chapter 7,Sec 19)

CHARACTERISTICS of DERIVATIVES:

a. Its value changes in response to the change in an underlying

b. It requires no initial net investment (or only a very minimal initial net investment)
c. It is settled at a future date.

HEDGING

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

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

***END OF DISCUSSION