Statement of Financial Position

Statement of financial position, also referred to as the

balance sheet:

1. Reports assets, liabilities, and equity at a specific date.

2. Provides information about resources, obligations to

creditors, and equity in net resources.

3. Helps in predicting amounts, timing, and uncertainty of

future cash flows.

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 Statement of Financial Position

Usefulness
◆ Computing rates of return.
◆ Evaluating the capital structure.
◆ Assess risk and future cash flows.
◆ Assess the company’s:
► Liquidity,
► Solvency, and
► Financial flexibility.

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 Statement of Financial Position

Limitations
◆ Most assets and liabilities are reported at historical
cost.
◆ Use of judgments and estimates.
◆ Many items of financial value
are omitted.

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 Classification

Elements of the Statement of Financial Position

ASSET LIABILITY EQUITY

◆ Resource controlled by the entity.

◆ Result of past events.
◆ Future economic benefits are expected to flow to the
entity.

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 Classification

Elements of the Statement of Financial Position

ASSET LIABILITY EQUITY

◆ Present obligation of the entity.

◆ Arising from past events.
◆ Settlement is expected to result in an outflow of
resources embodying economic benefits.

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 Classification

Elements of the Statement of Financial Position

ASSET LIABILITY EQUITY

◆ Residual interest in the assets of the entity after

deducting all its liabilities.

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 Classification
Current and noncurrent distinction
PAS 1, paragraph 60, provides that an entity shall present current and
noncurrent assets, and current and noncurrent liabilities, as separate
classification in the statement of financial position.

However, an entity shall present all assets and liabilities in the over order of
liquidity when such presentation provides information that is faithfully
represented and more relevant.

It also highlights assets that are expected to be realized within the current
operating cycle, and liabilities that are due for settlement within the same
period.

For some entities, such as financial institutions, a presentation of assets and

liabilities in increasing or decreasing liquidity provides information that is
faithfully represented and more relevant than a current and noncurrent
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 Classification

Operating Cycle

The operating cycle of an entity is the tie between the acquisition of

assets for processing and their realization in cash or cash
equivalents.

When the entity’s normal operating cycle is not clearly identifiable,

its duration is assumed to be twelve months.

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 Classification

Current Assets
Cash and other assets a company expects to convert into cash,
sell, or consume either in one year or in the operating cycle,
whichever is longer.
PAS1, paragraph 66, provides that an entity shall classify as asset as current
when:
a. The asset is cash or a cash equivalent unless the asset is restricted from
being exchanged or used to settle a liability for at least twelve months after
the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the
reporting period.
d. The entity expects to realize the asset or intend to sell or consume it
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within the entity’s normal operating cycle.
 Classification

Current Assets
Current assets are usually listed in the statement in financial
position in the order of liquidity.

PAS 1, paragraph 54, provides that as a minimum the line items

under current assets are:
a. Cash and cash equivalents
b. Financial assets at fair value, such as trading securities and
other investments in quoted equity instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses

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 Classification

Cash
◆ Generally consist of currency and demand deposits.

◆ Cash equivalents - short-term, highly liquid

investments that mature within three months or less.

◆ Restrictions or commitments must be disclosed.

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 Classification

Short-Term Investments

Portfolio Type Valuation Classification

Held-for- Current or
Debt Amortized Cost
Collection Non-current

Trading Debt or Equity Fair Value Current

Non-Trading Current or
Equity Fair Value
Equity Non-current

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 Classification

Receivables
Major categories of receivables should be shown in the
statement of financial position or the related notes.

A company should clearly identify

◆ Anticipated loss due to uncollectibles.

◆ Amount and nature of any non-trade receivables.

◆ Receivables used as collateral.

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 Classification

Inventories
Disclose:
◆ Basis of valuation (e.g., lower-of-cost-or-net realizable
value).

◆ Cost flow assumption (e.g., FIFO or average cost).

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 Classification

Prepaid Expenses
Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

◆ Insurance ◆ Rent
◆ Supplies ◆ Taxes
◆ Advertising

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 Classification

Non-Current Assets
PAS 1, paragraph 66, simply states that “an entity shall
classify all other assets not classified as current as noncurrent
assets”.

Accordingly, noncurrent assets include the following:

a. Property, plant and equipment

b. Long-term investments

c. Intangible assets

d. Other noncurrent assets

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 Classification

Property, Plant, and Equipment

Tangible long-lived assets used in the regular operations of
the business.
◆ Physical property such as land, buildings, machinery,
furniture, tools, and wasting resources (minerals).

◆ With the exception of land, a company either depreciates

(e.g., buildings) or depletes (e.g., oil reserves) these
assets.

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 Classification

Long-term Investments
1. Securities (bonds, ordinary shares, or long-term notes).

2. Tangible assets not currently used in operations (land held

for speculation).

3. Special funds (sinking fund, pension fund, or plant

expansion fund).

4. Non-consolidated subsidiaries or associated companies.

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 Classification

Intangible Assets
Lack physical substance and are not financial instruments.
◆ Patents, copyrights, franchises, goodwill, trademarks,
trade names, and customer lists.

◆ Amortize limited-life intangible assets over their useful

lives.

◆ Periodically assess indefinite-life intangibles for

impairment.

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 Classification
Contingent Assets
A contingent asset shall not be recognized because this may
result to recognition if income that may never be realized.

PAS 37, paragraph 10, defines contingent asset as a “possible

asset that arises from past event and whose existence will be
confirmed only by the occurrence and nonoccurrence of one or
more uncertain future events not wholly within the control of the
entity”.

Contingent assets usually arise from unplanned or other

unexpected events that give rise to the possibility of inflow
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 Classification

Current Liabilities
PAS 1, paragraph 69, provides that an entity shall classifya
liability as current when:
The entity expects to settle the liability within the entity’s normal
operating cycle.

b. The entity holds the liability primarily for the purpose of trading.

c. The liability is due to be settled within twelve months after the

reporting period.

d. The entity does not have an unconditional right to defer

settlement of the liability for at least for at least twelve months after
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 Classification

Current Liabilities
Obligations that a company generally expects to settle in
its normal operating cycle or one year, whichever is longer.

Includes:
1. Payables resulting from the acquisition of goods and
services.

2. Collections received in advance for the delivery of goods or

performance of services.

3. Other liabilities whose liquidation will take place within the

operating cycle or one year.
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 Classification
Other Noncurrent Assets
PAS 1, paragraph 69, simply states that “all liabilities not
classified as current liabilities are classified as noncurrent
liabilities”.

Examples of noncurrent liabilities are:

a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to entity officers
e. Long-term deferred revenue
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 Classification

Non-Current Liabilities
Obligations that a company does not reasonably expect to
liquidate within the longer of one year or the normal
operating cycle. Three types:
1. Obligations arising from specific financing situations.

2. Obligations arising from the ordinary operations of the

company.

3. Obligations that depend on the occurrence or non-

occurrence of one or more future events to confirm the
amount payable, or the payee, or the date payable.

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 Classification

Liabilities
◆ Estimated liabilities

◆ Covenants

◆ Nonadjusting events

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 Classification
Contingent Liability
Treatment of contingent liability

A contingent liability is not recognized in the financial statements.

However, if the present obligation is probable and the amount can

be measured reliably, the obligation is not a

contingent liability but shall be recognized as a provision.

An expense and an estimated liability shall be recorded in

recognizing a provision.

If the contingent liability is remote, no disclosure is necessary.

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 Classification

Working Capital

Working capital is the excess of current assets over current

liabilities and the working capital ratio is current assets divided by
current liabilities..

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 Classification

Equity
Simply stated, equity means “net assets” or total assets minus liabilities.

The term used in reporting the equity of an entity depending on the form of
the entity are:

a. Owner’s equity in a proprietorship

b. Partners’ equity in a partnership

c. Stockholders’ equity or shareholders’ equity in a corporation

However, the term equity may simply be used for all business entities.

Under PAS 1, paragraph 7, the holders of instruments classified as equity

are simply known as owners
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 Classification

Shareholders’ Equity
Philippine term IAS term
Capital stock Share capital
Subscribed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preference share capital
Additional paid capital Share Premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings Appropriation reserve
appropriated
Revelation surplus Revaluation reserve
Treasury stock Treasury share

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 Classification
Line item- Statement of financial position (PAS 1 paragraph 54)

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 Classification
Line item- Statement of financial position

The judgment on whether additional line items are presented separately is

based on the assessment of the following:

a. Nature and liquidity of assets

b. Functions of assets within the entity

c. Amount, nature and timing of liabilities

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 Statement of LEARNING OBJECTIVE 2
Prepare a classified statement of
Financial Position financial position.

◆ IFRS does not specify the order or format of the

items in the statement.

◆ Two general forms:

► Account form
● Assets on left side
● Equity and liabilities on right side

► Report form

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 Techniques of Disclosure

Cross-Reference and Contra Items

Companies “cross-reference” a direct relationship between an
asset and a liability on the statement of financial position.

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 Additional Information

Other Guidelines

Fair
Offsetting Consistency
Presentation

◆ IAS No. 1 indicates that it is important that assets and

liabilities, and income and expense, be reported
separately.
◆ It is proper to measure assets net of valuation allowances,
such as allowance for doubtful accounts or inventory net
of impairment.
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 Additional Information

Other Guidelines

Fair
Offsetting Consistency
Presentation

◆ The Conceptual Framework indicates that companies

should follow consistent principles and methods from one
period to the next.
◆ Accounting policies must be consistently applied for
similar transactions and events unless an IFRS requires a
different policy.
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 Additional Information

Other Guidelines

Fair
Offsetting Consistency
Presentation

◆ Faithful representation of transactions and events using

the definitions and recognition criteria in the Conceptual
Framework.
◆ Presumed that the use of IFRS with appropriate disclosure
results in financial statements that are fairly presented.

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