International Financial Reporting

Standards (IFRS)
&
International Accounting Standard
(IAS)

Cash and Cash

Equivalents
(IAS 7, IAS 39 and IFRS
9)
1. Kassaye Tuji& Other
Trade
2. Dereje T.
This material isReceivables
the property of Department of Accounting
1

and Finance, CoBE, AAU. Permission must be obtained from

Outline
Overview of financial instruments
Cash and Cash Equivalents
Trade and other receivables

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Overview of Financial Instruments

Types of Assets

Assets

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Physical
Assets
Financial
assets

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Overview of Financial Instruments

Definition of financial instrument

Financial
instruments

Any contract that gives rise to both a

financial asset of one entity and a financial
liability or equity instrument of another
entity.
Financial

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Assets

Financial
Liabilities
Equity
instrument
Derivatives

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Financial
instruments

Overview of Financial Instruments

Financial assets
Debt instrument
Equity
instrument

Primary
Derivatives

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Financial Assets (IAS 39/IFRS9)

Definition
Any asset that is:

Cash
an equity instrument of another entity
a contractual right to receive cash or another financial asset
a contractual right to exchange financial assets or liabilities
with another entity on potentially favourable terms
Examples of financial assets:
Cash
Trade receivables
Investment in shares

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Financial Liabilities (IAS 39/IFRS9)

Definition
Any liability that is:
a contractual obligation to deliver cash or another
financial asset
a contractual obligation to exchange financial assets
or liabilities with another entity on potentially
unfavorable terms.

Examples of financial liabilities:

Trade payables
Debenture (like a certificate of loan) loans payable
Redeemable (repaid after a period) preference (nonequity) shares

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Equity instrument(IAS 39/IFRS9)

Definition
A contract that evidences a residual interest in the
assets of an entity after deducting all of its
liabilities.

Examples of equity instruments:

Common stock
Preferred stock

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Cash
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CASH & Cash Equivalents

Objectives:
Presenting accounting for cash and
cash equivalents as regards to:
- Measurement,
- Classification,
- presentation, and
- Reporting

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Key questions
What is cash? Cash equivalents?
What constitutes cash and cash equivalents?
How do we measure cash and cash equivalents?
How do we classify and present cash and cash
equivalents?
How do we report cash and cash equivalents?

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Applicable Standards
Accounting for Cash and Cash Equivalents is mainly
governed by:
IAS 7 - Statement of Cash Flows
IAS 39 - Financial Instruments: Recognition and
Measurement, and
IFRS 9 - Financial Instruments: classification,
measurement, impairment, hedging
Objective of the Standard:

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is to require the provision of information about

the historical changes in cash and cash
equivalents of an entity by means of a
statement of cash flows.
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Basic Concepts & Terminologies

Cash:
Comprises cash on hand and
demand deposits.
Held in the form of currencies & notes
that are generally acceptable as a
means of exchange.
Includes the physical currency
notes and coins comprising foreign
currency
Bank overdraft if payable on demand
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the
lender)
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Basic Concepts & Terminologies

(Continued)
Cash Equivalents:
Are short-term, highly liquid investments
Are readily convertible to known amounts
of cash
Are subject to an insignificant risk of
changes in value.
Are non-physical cash instruments which
can be converted to physical cash within
a period of 90 days with little or no
transaction costs!
E.g
paper,
Marketable
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Scope & Exclusions of Cash & Cash

ExclusionsEquivalents (Continued)
Cash & cash equivalents do not include
the following:

Cash Advances with respect to entities

neither
fully
nor
proportionally
consolidated in the group FS;
Equity Investments unless they are, in
substance cash equivalents such as a
Preferred Stock with specified short
redemption date.

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Review questions
Cash and cash equivalents include all of the following
except:
a. Cash held in the form of currencies and notes
b. Demand deposit
c. Equity Investments which do
characteristics of cash equivalents

not

have

d. Bank overdraft which is payable on demand

e. Cash on hand

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the

Measurement
Cash and Cash Equivalents;
Cash is carried at its face value which is
equivalent to fair value.
Cash and cash equivalents in foreign
currencies are:
translated at the exchange rate of the date of the
operation
Converted to reporting currency on the reporting
dated at closing rates

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Presentation
Cash and Cash Equivalents;
Distinguish cash available for general
operations from restricted cash
Classify cash or cash equivalent assets as
a current cash or cash equivalent asset
when it is not restricted from being exchanged
or used to settle a liability for at least twelve
months from the balance sheet date.
Classify restricted cash as non-current
asset
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Presentation (contd)
Examples of restricted cash:
Cash and cash equivalents held by a Group
subsidiary that operates in a country where
there are exchange controls or legal
constraints
Sinking fund
Proceeds of a construction mortgage that is
restricted for use only for construction costs
Funds allocated for special purposes by
action of the companys board of directors.

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Exercise
Identify whether each of the following cash is restricted or
not:
1. Checking account held for general payments
2. Payroll Fund
3. Petty Cash fund
4. Cash and cash equivalents held by a Group subsidiary
that operates in a country where there are exchange
controls or legal constraints
5. Purchase fund
6. Change fund
7. Sinking fund
8. Proceeds of a construction mortgage that is restricted
for use
only for construction costs
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Presentation (contd)
Offsetting of cash accounts:
Cash debit and credit accounts with the same
financial entity shall not be reported net,
unless as a result of contractual agreements.
e.g. Assume that ABC Company has two
checking accounts with CBE (Arada and 6kilo branches). The account with Arada
branch shows a debit balance of ETB
50,000 and that of 6-kilo branch shows a
credit balance of ETB 10,000. How does
ABC Co report these balances in the
balance sheet?
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Presentation (contd)
Offsetting of cash accounts:
Offset bank overdrafts against cash account
provided that overdraft is payable on demand.
e.g. Assume that ABC Company has a checking
account with CBE. It has also an overdraft facility
up to ETB 20,000. At the end of the period, the
checking account shows a debit balance of ETB
200,000 while overdraft account shows a credit
balance of ETB 15,000. The overdraft is payable
on CBEs demand. How does ABC Co report
these balances in the balance sheet?

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Review questions
1) How do we measure cash?
2) Cash and cash equivalents in foreign currencies
are initially translated at the exchange rate on the
closing date (true/false)
3) As per International Financial Reporting
Standards, offsetting cash accounts is strictly
forbidden. (true/false)

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Reporting
Movements
of
cash
and
cash
equivalents
during the period and
disclosing the category they belong such
as:
- Cash at bank
- Cash on hand
- Short-term deposits
Reconciliation of the cash and cash
equivalents in the statement of cash flow to
the statement of financial position
Amount of cash subject to restrictions as
at the end of the reporting period
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Similarities and Difference between

IFRS & US GAAP in relation to Cash
SIMILARITY
& Cash Equivalents
According

to

both

standards,

cash

includes cash on hand & demand

deposits.
IAS 7 define cash equivalents as;
Short-term highly liquid investments that
are readily convertible to known
amounts of cash which mature within
90 days & are subject to insignificant
risks.
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Similarities and Difference b/n IFRS &

DIFFERENCE GAAP (Continued)
US GAAP does not offset bank overdrafts
against the cash account
IFRS includes bank overdrafts in the cash &
cash equivalents category if they are
repayable on demand & form an integral
part of an entitys cash management.

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When there is cash available in another

account in the same bank on which the
overdraft occurred offsetting against the
cash account is required!
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TRADE & OTHER

RECEIVABLES

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Applicable Standards
IAS 18/IFRS15 Revenues,
IAS 32 Financial Instruments
Presentation & Disclosures,
IAS 39 (or IFRS 9) Financial
Instruments Recognition &
Measurement

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What is receivable?

Receivables
Are asset designations applicable
to
all
debts,
unsettled
transactions or other monetary
obligations owed to a company
by its debtors or customers.
Form part of financial assets
under the category Loans and
Receivables.
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What is receivable?(Continued)

Loans and receivables are:

Non-derivate financial asset
with fixed or determinable
payments;
-that are not quoted in an
active market &
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Classification of Receivables
Receivables could be classified in to trade
and non-trade

Could you mention examples of trade

receivables? What about non-trade?
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Scope and Exclusions

Trade & other receivables include the following:
Bills receivables;

Products not yet billed;

Staff advances and prepayments;

Government Receivables (VAT & other taxes and

dues relating to operations)

Operating subsidies receivable;

Investment
receivable;

A/R on special transactions with government,

public bodies & international organizations;

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grant

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&

stabilization

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grants

Scope and Exclusions

(Continued)
A/R from associate undertakings (current
accounts or capital-account transactions,
etc.);
Customers credit balances
A/R on disposals of fixed assets and
marketable securities;
Accrued interest on loans & receivables
(whether relating to investments or
otherwise).
Other A/R (including accrued income);
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Scope and Exclusions

Deductions

(Continued)

The following shall be deducted from Trade &

Other Receivables:

Advances & prepayments received from

customers;
Rebates (refunds);
Discounts;
A/P on packaging, containers & materials
on which deposits are charged.

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Recognition
A trade receivable arises upon
fulfillment of the conditions required for
revenue recognition of a sale of
goods and services (IAS 18; IFRS 15).

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Measurement
The measurement rules to be applied depend
on the classification of the receivable as:
originated by the entity or
Business Model
held for trading.
Held for trading: A receivable shall be
classified as held for trading if it is incurred
principally for the purpose of selling or
repurchasing it in the near term through
factoring, securitization etc.
Originated by the entity: Receivables
originated by the entity are all receivables other
than those that are originated with the intention
of sale immediately or in the short term.

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Measurement (contd)
Measurement Methods (IFRS 9)
1. Amortized cost
2. Fair value through profit or loss

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Measurement (contd)
Measurement
cost

Methods:

Amortized

As per IAS 39, a FA shall be measured at

amortized cost if both of the following
conditions are met:
The asset is held within a business
model whose objective is to hold assets
in order to collect contractual Cash
flows

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The contractual terms of the financial

asset give rise on specified dates to

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Measurement (contd)
Measurement Methods: Fair value
Financial assets which do not fulfill
both of the above conditions are
valued at fair value i.e.
a Financial asset is measured at fair
value unless it is measured at amortized
cost

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Measurement (contd)
Example 1: Identify whether each of the following
cases require the classification of receivables as held
for trading or held to collect contractual cash flows:
a. An entity holds loans and advances to customers to collect
their contractual cash flows but would sell an investment in
particular circumstances, perhaps to fund unforeseen cash
shortage.
b. An entitys business model is to purchase portfolios of
financial assets, such as loans. Those portfolios may or may
not include financial assets with incurred credit losses. If
payment on the loans is not made on a timely basis, the entity
attempts to extract the contractual cash flows through various
means for example, by contacting the debtor through mail,
telephone, and so on.
c. ABC Co. has a business model with the objective of buying and
reselling
loans
and
advances from
various financial institutions
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Measurement (contd)

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Measurement (contd)
Initial Measurement:
Initial measurement rules detailed below are
applicable to both receivables originated by the
entity and held for trading.
When a receivable is recognized initially, the
Company shall measure it at its cost, which is its
nominal value, including VAT and other similar
taxes.
When the effect of the passage of time is not
significant, receivables are measured on an
undiscounted basis (which is the most
common case).
When the effect of the passage of time is significant,
receivables are initially measured on a discounted
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inIFRS
accordance
guidance
given in on the
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Measurement (contd)
Subsequent Measurement
a) Receivables originated by the entity
Initially recognized at cost:
= Nominal value - impairment or
uncollectability
Initially measured at discounted value:
= Carrying amount + discount
accumulation impairments
/uncollectibility
b) Receivables held for trading
Measured at fair value
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Measurement (contd)
Example 2: On 1st February 2015, Lion International
Bank provided working capital loan amounting Br 2m
to its customers (borrowers) in anticipation that the
bank will collect the loan after one year (31 January
2016). The fiscal year ends on June 30. Assume none
of this loan was repaid by 30 June 2016. There is no
collateral for the loan, except good credit history.
a) Identify whether this loan is accounted for using
amortized cost or fair value.
b) What was the value at which the loan should be
recorded on 1st of February 2015?
c) What was the value at which the loan should be
reported on 30 June 2015 assuming that there was no
impairments during 2015.
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what IFRS
valueTraining
should the loan
receivable recorded as of
44d) At AAU-

Measurement (contd)
a) Identify whether this loan is accounted for using
amortized cost or fair value.
Amortized cost because it is originated by LIB
and expected to be received in cash from the
borrower
b) What was the value at which the loan receivable should
be recorded on 1st of July 2015?
ETB 2m
c) What was the value at which the loan should be
reported on 30 June 2015 assuming that there was no
impairments during 2015.
ETB 2m

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Measurement (contd)
d) At what value should the loan receivable recorded
as of 30 June 2016?
Loan loss provision = 2,000,000 * 20% = 400,000
Net loan receivable = 2,000,000 400,000 =
1,600,000
The entry to record the provision would be:
Bad debt expense .

400,000

Allowance for doubtful debts . 400,000

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Measurement

(Continued)

Subsequent Measurement (Continued)

3. Receivables in Foreign Currencies
Are translated at the exchange rate of
the date of the operation.
Are restated at closing date using the
closing date exchange rate, and
the resulting exchange d/c is included
in the I/S, in accordance with effects of
changes in foreign exchange rates.
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Reporting and disclosure

(Continued)
As stated in IFRS 7, the following disclosures
are made with regard to receivables:
Movements in the balances of Account
Recivables
Allowances for doubtful accounts & all
movements during the year!
Receivables which are pledged or
otherwise restricted at the end of the
reporting period
Age analysis of receivables
Receivables that are transferred
Other relevant disclosures under financial
instruments.
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US GAAP Vs. IFRS (Concerning

Receivables)
Similarities
& Difference
Methods/
Treatments

US
GAAP

IFRS
(IAS)

Loans and receivables is

The
1 of the 4, FA categories.
loans
Loans
IAS 39 defines loans and
and
and
receivables as FA that are
receivabl
Receivables
created by the enterprise
es
by providing money,
category
goods or services directly
does not
to a debtor.
exist
under US
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US GAAP Vs. IFRS

Methods/
Treatments

Receivables)
Similarities and
Difference

Loans
and
Receiv
ables

US
GAAP

(Continued)
IFRS
(IAS)

IAS 39 requires loans and

Reports
receivable receivables to be measured
initially at cost.
s at net
Valuation
changes
realizabl
subsequent to the initial
purchase are accounted for
e value

(Continued
)

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(Concerning

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at amortized cost using the

effective interest method,
or fair value.

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US GAAP Vs. IFRS

Receivables)
Similarities and
Difference

Methods/
Treatments

US
GAAP

Impairm Similar to

IFRS, US GAAP
requires
Notes
entities to
Receiva
assess
bles
whether FA
are impaired
& recognize
the
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ent of

(Concerning

(Continued)
IFRS
(IAS)

Similar to
US GAAP,
IAS
39
specifies
that
entities
should
assess
whether its
FA
are
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US GAAP Vs. IFRS

Receivables)
Similarities and
Difference

Methods/
Treatments

US
GAAP

(Concerning

(Continued)
IFRS
(IAS)

Uncolle IFRS & US GAAP have similar

ctible
requirements
for
recording
Account Uncollectible A.R:
s
Collection of A/R previously
Receiva
written
off
is
accounted
for
ble

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similarly under US GAAP and

IFRS.
The only difference between
the two standards relates to
terminology; IFRS refers to
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the allowance accounts
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as a

THE END

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