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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)

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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.

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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.

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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.

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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

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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

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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

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EQUITY INSTRUMENT

A contract that evidences a


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

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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.
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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.

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

Spot
Exchange Closing
Rate Rate

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Borrowing costs

Interests and other


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

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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.

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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.

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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

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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

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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

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PRESENTATION AND DISCLOSURE

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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.

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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

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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

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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

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Subsequent Measurement

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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

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Illustrative Example

Journal Entries:

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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

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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

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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
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GAM: Accounting Session 7: Applying Accounting Policies on Financial Slide 34 of 37
Summary

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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!

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