Financial accounting needs to follow relevant accounting standards and norms when dealing with financial instruments, mainly including the following aspects:
How Financial Accounting Should Handle Financial Matters
- Classification of financial instruments: Financial accounting first classifies financial instruments for subsequent measurement and reporting. Financial instruments are usually divided into the following categories:
-Financial assets: including trading financial assets, available for sale financial assets, held to maturity investments, etc.
-Financial liabilities: including short-term borrowings, long-term borrowings, issued bonds, etc.
-Equity instruments, such as stocks.
- Measurement of financial instruments: Financial accounting needs to adopt appropriate measurement methods based on the nature and purpose of financial instruments. Common measurement methods include:
-Cost method: applicable to financial assets and liabilities measured at cost at initial recognition.
-Fair value method: applicable to financial assets and financial liabilities measured at fair value. Fair value refers to the price accepted in transactions between market participants.
-Amortized cost method: applicable to financial assets and financial liabilities measured at amortized cost.
- Impairment of financial instruments: Financial accounting needs to conduct impairment tests on financial instruments in accordance with accounting standards to determine whether there are signs of impairment. If there are signs of impairment, an impairment provision needs to be made to reflect the decrease in the value of financial instruments.
- Disclosure of financial instruments: Financial accounting needs to fully disclose information related to financial instruments in financial statements in accordance with accounting standards and regulatory requirements. The disclosure content includes the types, quantities, fair value, book value, impairment losses, etc. of financial instruments.
- Accounting treatment of financial instruments: Financial accounting requires accounting treatment of financial assets and financial liabilities based on the classification and measurement methods of financial instruments. This includes:
-When acquiring financial assets or liabilities: record initial costs, related expenses, etc.
-Subsequent measurement: Regular adjustments are made to financial assets and financial liabilities based on measurement methods, such as recognition of interest income and amortization of bond premiums and discounts.
-When disposing of financial assets or liabilities: calculate the disposal gains or losses and include them in the current period’s profit or loss.
- Financial risk management: Financial accountants need to pay attention to the risks brought by financial instruments, such as market risk, credit risk, etc. Financial institutions need to establish corresponding risk management policies and procedures to monitor and control the risks of financial instruments.Financial accounting needs to follow accounting standards and norms when dealing with financial instruments, classify, measure, impairment test, disclose, and account for financial instruments.
This helps to ensure that the financial statements reflect the company’s financial condition and performance truthfully, accurately, and completely. In this process, financial accountants need to possess solid financial accounting knowledge and skills to cope with the constantly changing financial market and regulatory environment.