CASH AND CASH EQUIVALENTS

 Most negotiable instruments (e.g. checks, bank drafts, and money orders) qualify as cash because
they can be converted to currency on demand or are acceptable for deposit at face value by a
bank.
 Cash also includes demand deposits because they can be withdrawn upon demand.
 Components of cash restricted as to use or withdrawal should be disclosed or reported separately
and classified as an investment, a receivable, or other asset.
 Deposits in foreign banks that are available for immediate and unrestricted withdrawal generally
qualify as cash and reported at their Philippine Peso equivalents as of the date of the statement
of the statement of the financial position.
 When cash in foreign banks is restricted as to use or withdrawal, it should be segregated and
designated as either current or noncurrent asset, depending on the period of restriction.
 Bank overdrafts are repayable on demand, they form an integral part of an entity’s cash
management. A characteristic of such banking arrangements is that the bank balance often
fluctuates from being positive to overdrawn.
 Compensatory balances are not available for unrestricted use and penalties will result if they are
used.
 The portion of the entity’s cash account that is a compensatory balance must be segregated and
shown as noncurrent asset if the related borrowings are noncurrent liabilities.
 If the borrowings are current liabilities, it is acceptable to show the compensatory balance as a
separately captioned current asset but should not be included in the cash and cash equivalents.
 The compensating balance amount and nature of the of the arrangements should be disclosed in
the notes to financial statements. The objective of disclosure is to provide the user of financial
statements with information to assist in evaluating the entity’s ability to meet obligations and in
assessing the effectiveness of cash management.
 Only highly liquid investments that are acquired three months before maturity can qualify as cash
equivalents.
 Cash equivalents are presented in the statement of financial position together with cash with the
title cash and cash equivalents.
 Cash should be recognized at FAIR VALUE.
 Underlying the definition of fair value is a presumption that an entity is a going concern without
any intention or need to liquidate.
 Fair value reflects the credit quality of the instrument and not the amount that an entity would
receive or pay in a forced transaction, involuntary liquidation or distress sale.

Summary of Classification of Cash-Related Items

Cash (coins, currency, checks, demand deposits, etc.)

 If unrestricted, report as cash in the current assets section.

 If restricted, identify and classify as current or noncurrent assets.
Petty Cash and change funds

 Report as cash in current assets section.

Foreign currencies

 Report as current asset if not subject to any foreign exchange restriction.

Deposits in foreign country / bank (converted into Philippine peso)

 Report as current asset if not subject to any foreign exchange restriction.

 Report as noncurrent asset if subject to foreign exchange restriction with disclosure of the
restriction.

Short-term papers (money market placements, certificate of deposits) with 3-month maturity or less from
the date of acquisition

 Report as current asset; may be combined with cash.

Compensating balances (legally restricted)

 Classified as current or noncurrent asset following the classification of the related borrowings
whether current or noncurrent.

Cash in bank held for retirement of long-term debt not currently maturing

 Segregate only if management’s intention is clear; report as non-current asset.

CASH CASH EQUIVALENTS (3- NON-CASH ITEMS

month)
Petty Cash Money-market placement Advances / IOUs as
Receivables
Demand Deposits Certificates of Deposit Unreplenished Expenses
Undeposited Checks Treasury bills Post-dated checks as
Receivables
Foreign Currencies Time Deposit Unused postage stamp as
Office Supplies Inventory or
Prepaid Expenses
Bank drafts
Money Orders
Compensating Balance
RECEIVABLES

Trade Receivables – result from the normal operating activities of the business, that is, the sale of the
company’s good or services to customers; results from sale of goods and services on credit.

 Accounts Receivable – nonwritten promises evidenced by signed invoices and

acknowledged delivery receipts; payments are generally within 30 to 90 days.
 Notes Receivable – unconditional written agreement to receive a certain sum of money
on a specific date.

Non-trade Receivables – arises from transactions other than from the sale of goods and services in the
normal course of business. These are recorded in separate accounts and reported on the statement of
financial position in individual groups as current or noncurrent, depending upon the length of their
collection period.

Recognition

 An entity shall recognize unconditional receivable as a financial asset on its statement of financial
position when and only when the entity becomes a party to the contractual provision of the
instrument and has a legal right to receive cash.
 Accounts receivable are recognized only when the criteria for revenue recognition are fulfilled.
 Accounts receivable are valued at the original exchange price between the firm and the outside party
less adjustment for cash discounts, sales returns, and allowances, yielding an approximation of fair
value or the amount to be collected. (simply: original exchange price – cash discounts, sales returns,
and allowances = fair value or the amount of cash to be collected)
 Revenue is recognized when realization has occurred and the revenue is earned.
 Recognition of revenue shall be at the time of sale. However, a company may defer revenue
recognition because a right to return exists.
PAS 18 par. 11 prescribes that the amount of revenue is the amount of cash and cash equivalents
received or receivable. However, when the inflow of cash or cash equivalents is deferred, the fair value
of the consideration may be less than the nominal amount of the receivable. The difference between
the fair value and the nominal amount of the consideration is recognized as interest revenue.
PFRS 9 par. 5. 1. 1 an entity shall measure financial assets at its fair value plus transaction costs that
are directly attributable to its acquisition.
PFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.

Measurement

Initial: fair value plus transaction costs that are directly attributable to its acquisition.

However, since there is a time value of money, there is a difference between the maturity of
receivables and the present value. The longer the time period until maturity, the greater the difference
between the two.
 Short-term receivables with no stated interest rate are usually measured at the original invoice
amount which is their maturity value and not their present value because the effect of the discounting is
not material under normal circumstances.

Subsequent: after initial recognition at fair value, an entity shall measure loans and receivables at
amortized cost using the effective interest method.

The amortized cost is the receivable amount measured at the date of acquisition, adjusted for
any principal payments, amortization of premium or discount, and reduced by any impairment or
estimated uncollectibility. (see PFRS 9)

Uncollectible or Impaired Accounts Receivables

Recognition of Expected Credit Losses

The allowance for credit losses is an accounting technique that enables companies to take these
anticipated losses into consideration in its financial statements to limit overstatement of potential
income.

 ECL Model aims to reflect the general pattern of deterioration or improvement in the credit
quality of financial instruments.
 The amount of ECL is recognized as loss allowance or provision depends on the extent of credit
deterioration since initial recognition.
 The ECL Model is more forward-looking where credit loss allowances of many entities particularly
financial institutions are expected to increase. The increase in the loss allowance will vary by entity
depending on past practice.
 Credit Loss = contractual cash flows that are due to an entity – cash flows that the entity expects
to receive, discounted at the original effective interest rate
 Entities with shorter term and higher quality financial assets are likely to be less significantly
affected while the quantitative effect for short-term trade receivables is likely to be relatively
small.

Notes Receivable – unconditional written agreements to receive a certain sum of money on a specific
date.

 Negotiable instruments (legally and readily transferable among parties and may be used to satisfy
debts by the holders of these instruments)
 Usually involve interest

Recognition and Measurement of Short-term Notes

 Interest bearing Note

a) The amount borrowed (principal) is listed as the face value and the interest charged is
expressed as a specific rate applied to this face value.
 b) Notes receivable should initially be recorded at the present value of the future cash
receipts on the date of issue.
c) PV of the short-term interest-bearing note = face value of the note
d) On issuance, note receivable would be debited for its face value. Prior to that, interest
revenue on the note is recorded in the usual fashion including any necessary year-end
adjustments for interest receivable.
 Non-interest-bearing note
a) The maturity value (both principal and implicit interest) is listed as the face value.
b) ALL NOTES implicitly contain interest.
c) Non-interest-bearing note is simply a case of the interest being included in the face value
rather than being stated as a separate rate. A better term would be a note with no stated
value.
 Interest-bearing note with unrealistic interest rate
a) The note and sale shall be recorded at the fair value of the goods or service provided, or
the market value of the note, whichever is the more clearly determinable.
b) The market value of the note is generally its present value determined by discounting all
future payments on the noted using an imputed interest rate., normally the prevailing
interest rate for similar instruments of issuers with similar credit rating.
c) When a note is received or issued for cash, the present value of the note is measured by
the cash proceeds.
 Note issued for noncash consideration
a) The principal of the note is determined by discounting all future payments on the note
using as imputed interest rate, the prevailing interest rate for similar instruments of issues
with similar credit rating.
 Note exchanged for cash and other privileges
a) Long-term notes must be recorded at their present value using the appropriate interest
rate.
 Dishonored notes
a) Interest continue to accrue on the face value plus any previously accrued interest at the
interest rate set by law.
b) The payee generally transfers the note to a special receivable account and initiates
collection efforts.
For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option
is elected. IFRS 9 contains an option to designate, at initial recognition, a financial asset as measured at
FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency
(sometimes referred to as an 'accounting mismatch')