Chapter 7

FINANCIAL INSTRUMENTS

Sec. 1. Scope. This Chapter provides principles for: (a) presenting financial instruments
as liabilities or net assets/equity and for offsetting financial assets and financial liabilities; (b)
recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell
non-financial items; and (c) disclosure in the entity’s financial statements that enable users to
evaluate the significance of financial instruments for the entity’s financial position and
performance and the nature and extent of risks arising from financial instruments to which the
entity is exposed during the period and at the end of the reporting period, and how the entity
manages those risk.

Sec. 2. Definition of Terms. For the purpose of this Manual, the terms stated below
shall be construed to mean as follows:

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

b. Derivative – is a financial instrument that derives its value from the movement in
commodity price, foreign exchange rate and interest rate of an underlying asset or
financial instrument.

c. 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. (Par. 9,
PPSAS 28)

d. Financial asset – is any asset that is:

1. Cash;
2. An equity instrument of another entity;
3. A contractual right to receive cash or another financial asset from another entity;
4. A contractual right to exchange financial instruments with another entity under
conditions that are potentially favorable; or
5. A contract that will or may be settled in the entity’s own equity instruments.

e. Financial liability – is any liability that is:

1. A contractual obligation:

i. To deliver cash or another financial asset to another entity; or

ii. To exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity.

2. A contract that will or may be settled in the entity’s own equity instruments.

Sec. 3. Financial Instruments. The following are the characteristics of a financial

instrument:

a. There must be a contract;

b. There are at least two parties to the contract; and

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 c. The contract shall give rise to both a financial asset of one party and a financial
liability or equity instrument of another party.

A specific example is NG holdings in the capital stock of Philippine Airlines (PAL)

through the BTr. In the books of the BTr, this is a financial asset because it represents resources
from which future economic benefits are expected to flow to the entity in the form of dividends or
similar distributions. On the other hand, PAL considers the NG holdings as a financial liability
because it gives rise to an obligation to return the amount on due date and to pay dividends in the
future. Financial instruments could also be cash in the form of bills, coins, and checks; cash in
bank; trade accounts; notes and loans; debt securities and equity securities.

Sec. 4. Cash and other Financial Assets. Cash is the most basic financial instrument
because it is the medium of exchange and is the basis on which all transactions are measured and
recognized in the financial statements. Cash deposited with a bank or similar financial institution
is a financial asset because it represents the contractual right of the depositor to withdraw money
from the bank or to draw a check or similar instrument against the balance in favor of a creditor in
payment of a financial liability. The bank, on the other hand, views this deposit as a financial
liability because of its obligation to deliver the money upon demand from the depositor.

Common examples of financial assets representing a contractual right to receive cash in

the future are: Accounts Receivable, Notes Receivable, Loans Receivable-GOCCs, Loans
Receivable-LGUs, and Loans Receivable-Others.

Sec. 5. Initial Recognition of Financial Asset. 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. (Par. 16, PPSAS 29)

Sec. 6. Initial Measurement of Financial Assets. When a financial asset at fair value
through surplus or deficit is recognized initially, an entity shall measure it at its fair value. In the
case of a financial asset not at fair value through surplus or deficit, the financial asset is
recognized at fair value plus transaction costs that are directly attributable to the acquisition, issue
or disposal of the financial asset. (Par. 45, PPSAS 29)
If the financial asset is measured at fair value through surplus or deficit, transaction costs
are expensed outright. In the example below, assume that there is P10,000 transaction cost.
Example for Financial Asset at Fair Value through surplus or deficit:
Account Title Account Code Debit Credit
Financial Assets Held for Trading 10201010 P 500,000
Cash in Bank-Local Currency, Bangko
Sentral ng Pilipinas 10102010 P 500,000
To recognize the acquired financial asset held for trading

Other Financial Charges 50301990 P 10,000

Cash in Bank-Local Currency, Bangko
Sentral ng Pilipinas 10102010 P 10,000
To recognize the transaction cost incurred

Example for Financial Asset not at Fair Value through surplus or deficit:
Account Title Account Code Debit Credit
Investments in Treasury Bonds-Foreign 10202040 P 510,000
Cash in Bank-Local Currency, Bangko
Sentral ng Pilipinas 10102010 P 510,000
To recognize investment in foreign treasury bonds

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 Sec. 7. Categories of Financial Assets. For the purpose of measuring a financial asset
after initial recognition, the financial assets are classified into four categories, namely: (Par. 47,
PPSAS 29)
a. Financial asset at fair value through surplus or deficit. A financial asset at fair value
through surplus or deficit is one that is either:
1. A held-for-trading asset, or
2. An asset 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 estimated.
b. Held-to-maturity investments. These are non-derivative financial assets with fixed or
determinable payments and fixed maturity that an entity has the positive intention and
ability to hold to maturity.
c. Loans and receivables. These are non-derivative financial assets with fixed or
determinable payments and are not quoted in an active market. Examples of financial
assets to be recognized in this category are loans, investments in debt instruments,
trade receivables and bank deposits.
d. Available-for-sale financial assets. Available-for-sale financial assets are those non-
derivative financial assets that are designated as available for sale or are not classified
as loans and receivables, held-to-maturity investments or financial assets at fair value
through surplus or deficit.

The initial measurement for financial asset at fair value through surplus or deficit and
financial asset classified as available for sale are the same, only that the changes in fair value of
financial asset measured at fair value through surplus or deficit are reported in surplus or deficit
while the changes in fair value of available for sale financial asset are reported in the net asset.

Sec. 8. Subsequent Measurement of Financial Assets. After initial recognition, an

entity shall measure financial assets, including derivatives that are assets, at their fair values,
without any deduction for transaction costs it may incur on sale or other disposal, except for:
a. Loans and receivables and Held-to-maturity investments, which shall be measured at
amortized cost using the effective interest method; and
b. Investments in equity instruments that do not have a quoted market price in an active
market and whose fair value cannot be reliably measured and derivatives that are
linked to and must be settled by delivery of such unquoted equity instruments, which
shall be measured at cost. (Par. 48, PPSAS 29)

Example:

On December 31, 2014, the fair value of the Financial Assets Held for Trading with a
carrying amount of P500,000 is P600,000. The changes in fair value shall be reported in
surplus/deficit. The following entry shall be made on December 31, 2014 to reflect the
changes in fair value.

Account Title Account Code Debit Credit

Financial Assets Held for Trading 10201010 P 100,000
Gain from Changes in Fair Value of
Financial Instruments 40501110 P 100,000
To recognize the changes in fair value of the Financial Assets Held for Trading

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 On December 31, 2014, the fair value of the Financial Assets classified as Available-for-
sale with a carrying amount of P500,000 is P600,000. If the financial asset is classified as
Available-for-sale, the changes in fair value shall be reported in the Statement of Changes
in Net Assets. Below is the entry to recognize the changes in fair value of the available
for sale financial asset:

Account Title Account Code Debit Credit

Investment in Bonds 10203020 P 100,000
Unrealized Gain/(Loss) from
Changes in the Fair Value of
Financial Assets 30501010 P 100,000
To recognize the change in the fair value of the Available-for-sale

Sec. 9. Measurement at Amortized Cost. Investments of NGAs in BTr issued bonds,

loans and receivable accounts are measured at amortized cost. The following are illustrative
accounting entries on measurement at amortized cost:

On January 1, 2014, an NGA granted loan amounting to P500,000 to an LGU with annual
interest of 6%. On December 30, 2014, the LGU made a partial payment of P 100,000.

The entries on the books of the NGA are:

Account Title Account Code Debit Credit

January 1, 2014
Loans Receivable-Local Government
Units 10301040 P 500,000
Cash in Bank-Local Currency,
Current Account 10102020 P 500,000
To recognize the loan granted to LGU

December 30, 2014

Cash in Bank-Local Currency, Current
Account 10102020 P 130,000
Loans Receivable-Local Government
Units 10301040 P 100,000
Interest Income 40202210 30,000
To recognize the receipt of partial payment of loan of the LGU directly
credited to the NGA’s bank account

The amortized amount at year-end of the Loans Receivable account of P 400,000 is its cost
on initial measurement less the repayment.

Sec. 10. Impairment of Financial Assets. An entity shall assess at the end of each
reporting period whether there is any objective evidence that a financial asset or group of
financial assets is impaired. If any such evidence exists, the entity shall measure the amount of
loss as the difference between the carrying amount of the asset and the present value of estimated
future cash flows discounted at the financial asset’s original effective interest rate. The carrying
amount of the asset shall be reduced either directly or through use of an allowance account. The
amount of the loss shall be recognized in surplus or deficit.

In case of Accounts Receivable, the Allowance for Impairment shall be provided in an

amount based on collectibility of receivable balances and evaluation of such factors as aging of
accounts, collection experiences of the agency, expected loss experiences and identified doubtful
accounts.

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 An adjusting journal entry to recognize the impairment loss is as follows:

Example 1: Impairment of Accounts Receivable – P 1,000

Account Title Account Code Debit Credit

Impairment Loss-Loans and
Receivables 50503020 P 1,000
Allowance for Impairment-
Accounts Receivable 10301011 P 1,000
To recognize impairment loss on accounts receivable

Example 2: Impairment of Loans Receivable from an LGU – P 50,000

Account Title Account Code Debit Credit

Impairment Loss-Loans and
Receivables 50503020 P 50,000
Allowance for Impairment-Loans
Receivable, Local Government
Units 10301041 P 50,000
To recognize impairment loss on loans receivable from LGU

Sec. 11. Derecognition of Financial Assets. Derecognition is the process of removing a

previously recognized financial asset, liability or equity from the statement of financial position.
An entity shall derecognize a financial asset when, and only when:

a. The contractual rights to the cash flows from the financial asset expire or are
waived; or

b. The entity transfers the financial assets provided the following conditions exist:

1. The entity transfers substantially all the risks and rewards of ownership of the
financial assets; and
2. The entity has not retained control over the financial assets.

The derecognition of financial assets is subject to the provisions of P.D. No. 1445 on the
writing off of receivables and other policies issued by the COA.

Example: An LGU paid its outstanding loan balance amounting to P1,000,000 to an

NGA. The NGA, upon receipt of the payment from the LGU, will derecognize its
receivable account from said entity because its contractual rights to the cash flows from
the financial asset expire. The journal entry to recognize the derecognition follows:

Account Title Account Code Debit Credit

Cash in Bank-Local Currency,
Current Account 10102020 P 1,000,000
Loans Receivable-Local
Government Units 10301040 P 1,000,000
To recognize receipt of collection of the loan receivable from LGU directly
credited to the NGA’s bank account

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 When the contractual rights to the cash flows from the financial asset are waived as
approved by the COA, assuming that impairment losses have been previously recognized, the
entry will be:

Account Title Account Code Debit Credit

Allowance for Impairment-Loans
Receivable-Local Government
Units 10301041 P1,000,000
Loans Receivable-Local
Government Units 10301040 P1,000,000
To recognize waiver of the loan receivable from the LGU

Sec. 12. Transfer of Financial Assets. An entity transfers a financial asset if, and only
if, it either:

a. Transfers the contractual rights to receive the cash flows of the financial asset; or

b. Retains the contractual rights to receive the cash flows of the financial asset, but
assumes a contractual obligation to pay the cash flows to one or more recipients in an
arrangement that meets the following conditions:

1. The entity has no obligation to pay amounts to the eventual recipients unless it
collects equivalent amounts from the original asset. Short-term advances by the
entity with the right of full recovery of the amount lent plus accrued interest at
market rates do not violate this condition; and

2. The entity is prohibited by the terms of the transfer contract from selling or
pledging the original asset other than as security to the eventual recipients for the
obligation to pay them cash flows.

3. The entity has an obligation to remit any cash flows it collects on behalf of the
eventual recipients without material delay. In addition, the entity is not entitled to
reinvest such cash flows, except for investments in cash or cash equivalents
during the short settlement period from the collection date to the date of required
remittance to the eventual recipients, and interest earned on such investments is
passed to the eventual recipients.

When an entity transfers a financial asset, it shall evaluate the extent to which it retains
the risks and rewards of ownership of the financial asset. In this case:

a. If the entity transfers substantially all the risks and rewards of ownership of the
financial asset, the entity shall derecognize the financial asset and recognize
separately as assets or liabilities any rights and obligations created or retained in the
transfer.

b. If the entity retains substantially all the risks and rewards of ownership of the
financial asset, the entity shall continue to recognize the financial asset.

c. If the entity neither transfers nor retains substantially all the risks and rewards of
ownership of the financial asset, the entity shall determine whether it has retained
control of the financial asset.

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 In this case:

1. If the entity has not retained control, it shall derecognize the financial asset and
recognize separately as assets or liabilities any rights and obligations created or
retained in the transfer.

2. If the entity has retained control, it shall continue to recognize the financial asset
to the extent of its continuing involvement in the financial asset.

Sec. 13. Financial Liability. Examples of financial liabilities which are transacted by
many national government agencies are Accounts Payable, Bail Bonds Payable, Notes Payable,
Interest Payable, Bonds Payable-Domestic, Bonds Payable-Foreign, and Loans Payable-Domestic
and Loans Payable-Foreign representing domestic and foreign debt accounted at the BTr.

Sec. 14. Recognition of a Financial Liability. 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. (Par. 16, PPSAS 29)

A financial instrument that does not explicitly establish a contractual obligation to

deliver cash or another financial asset may establish an obligation indirectly through its terms and
conditions.

a. A financial instrument may contain a non-financial obligation that must be settled if,
and only if, the entity fails to make distributions or to redeem the instrument. If the
entity can avoid a transfer of cash or another financial asset only by settling the non-
financial obligation, the financial instrument is a financial liability.

b. A financial instrument is a financial liability if it provides that on settlement the entity

will deliver either:

1. Cash or another financial asset; or

2. Its own shares whose value is determined to exceed substantially the value of the
cash or other financial asset. Although the entity does not have an explicit
contractual obligation to deliver cash or another financial asset, the value of the
share settlement alternative is such that the entity will settle in cash. In any event,
the holder has in substance been guaranteed receipt of an amount that is at least
equal to the cash settlement option. (Par. 24, PPSAS 28)

Sec. 15. Initial Measurement of Financial Liabilities. When a financial liability is

recognized initially, an entity shall measure it at its fair value plus, in the case of a financial
liability not at fair value through surplus or deficit, transaction costs that are directly attributable
to the issue of the financial liability. (Par. 45, PPSAS 29)

For financial liability designated initially as at fair value through surplus and deficit, the
related transactions costs are expensed immediately. For financial liability measured at amortized
cost, transaction costs are included in the initial measurement.

Transaction costs are incremental costs that are directly attributable to the issue or
disposal of a financial liability. An incremental cost is one that would not have been incurred if
the entity had not issued or disposed the financial liability. Transaction costs include: (a) fees and
commissions paid to agents, advisers, brokers and dealers; (b) levies by regulatory agencies and
securities exchanges; and (c) transfer taxes and duties.

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 Example: On January 1, 2014, the BTr issued a 5-year P100,000 face value bonds for
P95,787.63. Interest is 5% payable annually. The prevailing interest rate is 6%. The
bonds were issued through an underwriter and the agency paid bond issue cost of
P34,000. The financial liability was measured at amortized cost. The following are the
accounting journal entries to recognize the transaction:

Account Title Account Code Debit Credit

Cash in Bank-Local Currency, P95,787.63
Bangko Sentral ng Pilipinas 10102010
Discount on Bonds Payable-Domestic 20102021 4,212.37
Bond Payable-Domestic 20102020 P100,000.00
To recognize the issuance of bonds payable by the BTr

Bond Issue Cost-Domestic 20102023 P34,000

Cash in Bank-Local Currency,
Bangko Sentral ng Pilipinas 10102010 P34,000
To recognize the incurrence of bond issue cost by the BTr

Bond issue costs are not treated as outright expense but amortized over the life of the
bond similar to that for discount on bonds payable. Bond issue costs are conceived as cost of
borrowing and therefore will increase interest expense.

The amortization of bond issue costs is recognized by debiting interest expense and
crediting bond issue cost. Under the effective interest method of amortization, the bond issue cost
should be aggregated to the discount on bonds payable and netted against the premium on bonds
payable.

Sec. 16. Subsequent Measurement of Financial Liabilities. After initial recognition,

an entity shall measure a financial liability at amortized cost using the effective interest method.
The “amortized cost” of a financial liability is the amount at which the financial liability is
measured at initial recognition minus the principal repayments, plus or minus the cumulative
amortization using the effective interest method of any difference between the initial amount and
the maturity amount, and minus any reduction (directly or through the use of an allowance
account) for impairment or uncollectibility. (Par. 10, PPSAS 29)

The difference between the face amount and present value of the financial liability is
amortized through the interest expense using the effective interest method. The difference
between the face amount and present value is either discount or premium on the issue of financial
liability.

Assume:
Face value of the bond P100,000
Term 5-years
Selling price 95,787.63
Issue Date January 1, 2014
Nominal Rate 5% annually
Effective interest rate 6% annually

Face value of the bond P 100,000.00

Selling price 95,787.63
Discount on Bonds Payable P 4,212.37

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 Below is the schedule of amortization based on the information given:

Amortization Schedule
Debit
Interest Amortization Credit Carrying
Interest Balance
Expense of Bond Balance of Amount of
Date Expense of Bond
(5% of Discount Bonds the Bonds
FV)
(6% of G1) Discount
(C-B) Payable (F-E)
(E1-D)
A B C D E F G
January 1, 2014 4,212.37 100,000.00 95,787.63
December 31, 2014 5,000.00 5,747.26 747.26 3,465.11 100,000.00 96,534.89
December 31, 2015 5,000.00 5.792.09 792.09 2,673.02 100,000.00 97,326.98
December 31, 2016 5,000.00 5,839.62 839.62 1,833.40 100,000.00 98,166.60
December 31, 2017 5,000.00 5,890.00 890.00 943.40 100,000.00 99,056.60
December 31, 2018 5,000.00 5,943.40 943.40 - 100,000.00 100,000.00
E1 – previous balance of the Bond Discount
G1 – previous Carrying Amount of the Bonds

The amortized cost of the bonds payable on December 31, 2014 will be:

Credit Balance of bonds payable P100,000.00

Debit balance of bond discount (3,465.11)
Amortized cost (December 31, 2014) P 96,534.89
Or
Book value of the Bonds (January 1, 2014) P 95,787.63
Amortization of Bond discount 747.26
Amortized cost (December 31, 2014) P 96,534.89

Sec. 17. Derecognition of Financial Liability. An entity shall remove a financial

liability (or a part of a financial liability) from its statement of financial position when, and only
when, it is extinguished, that is, when the obligation specified in the contract is discharged,
waived, or cancelled, or expires.

Example: A government entity paid its P1,000,000 loan from a local creditor. Upon
payment of the loan, the entity shall derecognize its liability from the local creditor. The
journal entry in the agency’s books follows:

Account Title Account Code Debit Credit

Loans Payable-Domestic 20102040 P1,000,000
Cash in Bank-Local Currency,
Bangko Sentral ng Pilipinas 10102010 P1,000,000
To recognize the payment of the loan

Loans Payable-Domestic 20102040 P 1,000,000

Miscellaneous Income 40609990 P 1,000,000
To recognize the condoned/waived loan

Sec. 18. Equity Instrument. The term “equity instrument” may be used to denote the
following:

a. A form of unitized capital such as ordinary or preference shares;

b. Transfers of resources (either designated or agreed as such between the parties to the
transaction) that evidence a residual interest in the net assets of another entity; and/or

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 c. Financial liabilities in the legal form of debt that, in substance, represent an interest in
an entity’s net assets. (AG27, PPSAS 28)

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. It
represents an ownership interest in an entity. This includes ordinary share, preference share and
other share capital.

The government securities issued by the BTr are debt securities in the form of treasury
bills and treasury notes. They have maturity date and maturity value. Other examples include
Bangko Sentral ng Pilipinas commercial papers and preference shares with mandatory redemption
date or are redeemable at the option of the holder.

Sec. 19. Derivatives. Derivative is a financial instrument that derives its value from the
movement in commodity price, foreign exchange rate and interest rate of an underlying asset or
financial instrument.

PPSAS 29 provides the following characteristics of a derivative financial instrument:

a. Its value changes in response to the change in a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or rates,
credit rating or credit index, or other variable, provided in the case of a non-financial
variable that the variable is not specific to a party to the contract (sometimes called
the “underlying”);

b. It requires no initial net investment or an initial net investment that is smaller than
would be required for other types of contracts that would be expected to have a
similar response to changes in market factors; and

c. It is settled at a future date.

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.

Sec. 20. Hedging. Hedging is a method of offsetting a potential financial loss or the
structuring of a transaction to reduce risk involving financial instruments. Hedge accounting
recognizes the offsetting effects on surplus or deficit of changes in the fair values of the hedging
instrument and the hedged item.

Par. 96 of PPSAS 29 provides the 3 types of hedging relationships:

a. Fair value hedge: a hedge of the exposure to changes in fair value of a recognized
asset or liability or an unrecognized firm commitment, or an identified portion of
such an asset, liability or firm commitment, that is attributable to a particular risk and
could affect surplus or deficit.

b. Cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is
attributable to a particular risk associated with a recognized asset or liability (such as
all or some future interest payments on variable rate debt) or a highly probable
forecast transaction and (ii) could affect surplus or deficit.

c. Hedge of a net investment in a foreign corporation.

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 A hedge or hedging relationship has two components, namely hedging instrument and
hedged item.

Sec. 21. Hedging Instrument. A designated derivative or a designated non-derivative

financial asset or non-derivative financial liability whose fair value or cash flows are expected to
offset changes in the fair value or cash flows of designated hedged item.

Sec. 22. Hedged Item. Hedged item is an asset, liability, firm commitment, highly
probable forecast transaction or net investment in a foreign operation that (a) exposes that entity
to risk of changes in fair value or future cash flows and (b) is designated as being hedged.

Sec. 23. Presentation of Financial Instruments. The issuer of a financial instrument

shall classify the instrument, or its component parts, on initial recognition as a financial asset, a
financial liability or an equity instrument in accordance with the substance of the contractual
arrangement and the definitions of a financial asset, a financial liability and an equity instrument.
(Par. 13, PPSAS 28)

Sec. 24. Illustrative Accounting Entries on Financial Assets

a. Financial Assets classified as Held-to-Maturity

On January 1, 2014 the BTr purchased a 5-year 5% P100,000 face value bonds for
P95,787.63. The issuer pays the interest annually. The prevailing interest rate is 6%.
The table below shows the amortization of bond discount.

Amortization Schedule
Carrying
Interest Interest Amortization of
Amount of the
Date Income Income Bond Discount
Bonds
(5% x FV) (6% x E1) (C-B)
(E1+D)
A B C D E
January 1, 2014 95,787.63
December 31, 2014 5,000 5,747.26 747.26 96,534.89
December 31, 2015 5,000 5,792.09 792.09 97,326.98
December 31, 2016 5,000 5,839.62 839.62 98,166.60
December 31, 2017 5,000 5,890.00 890.00 99,056.60
December 31, 2018 5,000 5,943.40 943.40 100,000.00
E1 – previous balance of the Carrying Amount of the Bonds

Note: On maturity date December 31, 2018, the carrying amount of the investment is
P100,000 which is equal to the face value of the bond.

The accounting entries in the books of the BTr are as follows:

Account Title Account Code Debit Credit

January 1, 2014
Investment in Bonds 10203020 P 95,787.63
Cash in Bank-Local Currency,
Bangko Sentral ng Pilipinas 10102010 P 95,787.63
To recognize investment in bonds

Note: Cash in Bank-Local Currency, Current Account and Cash in Bank-Local

Currency, Savings Account may also be used.

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 Account Title Account Code Debit Credit
December 31, 2014
Cash in Bank-Local Currency, P 5,000
Bangko Sentral ng Pilipinas 10102010
Interest income 40202210 P 5,000
To recognize receipt of annual interest
Investment in Bonds 10203020 P 747.26
Interest income 40202210 P 747.26
To recognize amortization of bond discount
December 31, 2015
Cash in Bank-Local Currency, P 5,000
Bangko Sentral ng Pilipinas 10102010
Interest income 40202210 P 5,000
To recognize receipt of annual interest
Investment in Bonds 10203020 P 792.09
Interest income 40202210 P 792.09
To recognize amortization of bond discount
December 31, 2016
Cash in Bank-Local Currency, P 5,000
Bangko Sentral ng Pilipinas 10102010
Interest income 40202210 P 5,000
To recognize receipt of annual interest
Investment in Bonds 10203020 P 839.62
Interest income 40202210 P 839.62
To recognize amortization of bond discount
December 31, 2017
Cash in Bank-Local Currency, P 5,000
Bangko Sentral ng Pilipinas 10102010
Interest income 40202210 P 5,000
To recognize receipt of annual interest

Investment in Bonds 10203020 P 890

Interest income 40202210 P 890
To recognize amortization of bond discount
December 31, 2018
Cash in Bank-Local Currency, P 5,000
Bangko Sentral ng Pilipinas 10102010
Interest income 40202210 P 5,000
To recognize receipt of annual interest
Investment in Bonds 10203020 P 943.40
Interest income 40202210 P 943.40
To recognize amortization of bond discount
Cash in Bank-Local Currency, P 100,000
Bangko Sentral ng Pilipinas 10102010
Investment in Bonds 10203020 P 100,000
To recognize maturity of investment in bonds

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b. Loans Receivable
On January 1, 2014, an NGA relent a loan to an LGU amounting to P1,000,000 payable
in 5 years with 6% annual interest. The accounting entries to recognize the transactions
are as follows:
Account Title Account Code Debit Credit
January 1, 2014
Loans Receivable-Local Government
Units 10301040 P 1,000,000
Cash in Bank-Local Currency,
Current Account 10102020 P 1,000,000
To recognize the relent loan
December 31, 2014
Cash in Bank-Local Currency,
Current Account 10102020 P 200,000
Loans Receivable-Local
Government Units 10301040 P 200,000
To recognize the collection of receivable
Cash in Bank-Local Currency,
Current Account 10102020 P 60,000
Interest income 40202210 P 60,000
To recognize collection of interest

c. Notes Receivable
On March 15, 2014, a government hospital received promissory notes from several
patients amounting to P100,000 payable in 6 months with 6% annual interest. The
accounting entries to recognize the transactions follow:

Account Title Account Code Debit Credit

March 15, 2014
Notes Receivable 10301020 P 100,000
Hospital Fees 40202170 P 100,000
To recognize the receipt of the promissory note
August 15, 2014
Impairment Loss-Loans and
Receivables 50503020 P 30,000
Allowance for Impairment-Notes
Receivable 10301021 P 30,000
To recognize impairment of Notes Receivable

September 15, 2014

Cash-Collecting Officers 10101010 P 70,000
Allowance for Impairment-Notes
Receivable 10301021 30,000
Notes Receivable 10301020 P 100,000
To recognize collection of the balance of the Notes Receivable
Cash-Collecting Officers 10101010 P 2,850
Interest Income 40202210 P 2,850
To recognize collection of interest income

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 Sec. 25. Illustrative Accounting Entries on Financial Liabilities

On January 1, 2014 the BTr issued a 5-year 9% P100,000 domestic bonds at 10% effective
interest rate for P96,149. Interests are paid semi-annually. The amortization schedule based on
the information given is presented below:

Amortization Schedule
Debit
Interest Amortization Credit Carrying
Interest balance of
Expense of Bond Balance of Amount of
Date Expense Bond
(4.5% x Discount Bonds the Bonds
(5% x G1) Discount
FV) (C-B) Payable (F-E)
(E1-D)
A B C D E F G
January 1, 2014 3,851.00 100,000 96,149.00
June 30, 2014 4,500 4,807.45 307.45 3,543.55 100,000 96,456.45
December 31, 2014 4,500 4,822.82 322.82 3,220.73 100,000 96,779.27
June 30, 2015 4,500 4,838.96 338.96 2,881.76 100,000 97,118.24
December 31, 2015 4,500 4,855.91 355.91 2,525.85 100,000 97,474.15
June 30, 2016 4,500 4,873.71 373.71 2,152.14 100,000 97,847.86
December 31, 2016 4,500 4,892.39 392.39 1,759.75 100,000 98,240.25
June 30, 2017 4,500 4,912.01 412.01 1,347.74 100,000 98,652.26
December 31, 2017 4,500 4,932.61 432.61 915.13 100,000 99,084.87
June 30, 2018 4,500 4,954.24 454.24 460.88 100,000 99,539.12
December 31, 2018 4,500 4,960.88 460.88 - 100,000 100,000.00
E1 – previous balance of the Bond Discount
G1 – previous Carrying Amount of the Bonds

The accounting entries are as follows:

Account Title Account Code Debit Credit

January 1, 2014
Cash in Bank-Local Currency, Bangko
Sentral ng Pilipinas 10102010 P 96,149
Discount on Bonds Payable-Domestic 20102021 3,851
Bonds Payable-Domestic 20102020 P 100,000
To recognize the issue of bonds

June 30, 2014

Interest Expenses 50301020 P 4,500
Cash in Bank-Local Currency,
Bangko Sentral ng Pilipinas 10102010 P 3,600
Due to BIR 20201010 900
To recognize payment of semi-annual interest and taxes withheld from the investor

Due to BIR 20201010 P 900

Cash-Tax Remittance Advice 10104070 P 900
To recognize remittance to BIR of the withheld final tax

June 30, 2014

Interest Expenses 50301020 P 307.45
Discount on Bonds Payable-
Domestic 20102021 P 307.45
To recognize amortization of bond discount

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 Account Title Account Code Debit Credit
December 31, 2014
Interest Expenses 50301020 4,500
Cash in Bank-Local Currency,
Bangko Sentral ng Pilipinas 10102010 3,600
Due to BIR 20201010 900
To recognize payment of semi-annual interest and taxes withheld

Due to BIR 20201010 P 900

Cash-Tax Remittance Advice 10104070 P 900
To recognize remittance to BIR of the final tax withheld

Interest Expenses 50301020 P 322.82

Discount on Bonds Payable-
Domestic 20102021 P 322.82
To recognize amortization of bond discount

December 31, 2018

Bonds Payable-Domestic 20102020 P 100,000
Cash in Bank-Local Currency,
Bangko Sentral ng Pilipinas 10102010 P 100,000
To recognize redemption of the bonds

Sec. 26. Presentation in the Financial Statements. Financial instruments accounts

shall appear in the Statement of Financial Position as follows.

ABC Agency
Condensed Statement of Financial Position
As at December 31, 2014

Asssets Note 2015 2014

Current Assets
Cash and Cash Equivalents 6 xxx xxx
Investments 7 xxx xxx
Receivables 8 xxx xxx
Non-Current Assets
Investments 7 xxx xxx
Receivables 8 xxx xxx

Liabilities and Equity

Current Liabilities
Financial Liabilities 15 xxx xxx

Non-Current Liabilities
Financial Liabilities 15 xxx xxx

Note: Refer to Annex F of Volume I of this Manual for the sample disclosure in the Notes to the
Financial Statements.

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 Sec. 27. Forms and Reports to be Prepared and Maintained. The following
schedules and forms shall be prepared and maintained by the agencies relative to their financial
instruments accounts:

a. To be prepared by all National Government Agencies

1. Schedule of Accounts Payable (Appendix 54)

2. Schedule of Accounts Receivable (Appendix 55)
3. Registry of Accounts Written-Off (Appendix 56)

b. The BTr shall maintain records on loan availments and repayments, grant availments
and utilization, and guaranteed loans using its computerized application.

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