STATEMENT OF FINANCIAL POSITION 2

MODULE

The Balance Sheet

Learning Objectives:
The learners should be able to:
1. Identify the elements of the SFP and describe each of them.
2. Prepare an SFP using the report form and the account form with proper classification of items as
current and noncurrent.
3. Appreciate the importance of the SFP in a business organization.

Statement of financial position is a formal statement showing the three elements comprising financial position,
namely assets, liabilities, and equity. Users analyze the statement of financial position to evaluate such factors as
liquidity, solvency, and the need of theentity for additional financing.
 Liquidity is the ability of the entity to meet currently maturing obligations.
 Solvency is the availability of cash over the longer term to meet maturing obligations.

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 a presentation
provides information that is faithfully represented and more relevant.
 When an entity supplies goods or services within a clearly identifiable operating cycle, the separate classification
of current and noncurrent assets and liabilities is useful information by distinguishing between net assets that
are continuously circulating as working capital from the net assets used in long-term operations.
 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 presentation.

ASSETS
 Assets are defined as “resources controlled by the entity as result of past transactions and events
andfrom which future economic benefits are expected to flow to the entity”.
 In layman’s language and in short, assets are properties owned.
 The essential; characteristics of an assets are:
a. The asset is controlled by the entity.
b. The asset is a result of a past transaction or event.
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 c. The asset provides future economic benefits.
 The cost of the assets can be measured reliably.

CURRENT ASSETS NON-CURRENT ASSETS

PAS1, paragraph 66, provides that an entity PAS 1, paragraph 66, simply states that “an
shall classify as asset as current when: entity shall classify all other assets not
 The asset is cash or a cash classified as current as noncurrent assets”.
equivalent unless the asset is Accordingly, noncurrent assets include the
restricted from being exchanged or following:
used to settle a liability for at least  Property, plant, and equipment
twelve months after the reporting  Long-term investments
period.  Intangible assets
 The entity holds the asset primarily  Other noncurrent assets
for the purpose of trading.
 The entity expects to realize the Note: PAS 1, paragraph 56, provides that
assets within twelve months after “when an entity presents current and
the reporting period. noncurrent assets as separate classifications
 The entity expects to realize the on the face of the statement of financial
asset or intends to sell or consume it position, it shall not classify deferred tax
within the entity’s normal operating assets as current assets”.
cycle.

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:
1. Cash and cash equivalents
2. Financial assets at fair value, such as
trading securities and other
investments in quoted equity
instruments.
3. Trade and other receivables
4. Inventories
5. Prepaid expenses

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.

Contingent asset
 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 economic benefits to the entity.
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  An example is a claim that an entity is pursuing through legal processes when the outcome is uncertain.

Treatment of contingent assets: A contingent asset shall not be recognized because this may result to recognition if
income that may never be realized.

LIABILITIES
Liabilities are defined as “present obligations of an entity from past transactions or events, the settlement of
which is expected to result an outflow from the entity of resources embodying economic benefits.

The essential characteristics of liabilities are:

 The ability is the present obligation of a particular entity. The entity liable must be identified. It is not necessary
that the payee or the entity to which the obligation is owed be identified.
 The liability arises from a past transaction or event. This means that the liability is not recognized until it is
incurred.
 The settlement of the liability requires an outflow of resources embodying economic benefits.

CURRENT ASSETS NON-CURRENT ASSETS

PAS 1, paragraph 69, provides that an The term “noncurrent liabilities” is also
entity shall classify a liability as current a residual definition. PAS 1, paragraph
when: 69, simply states that “all liabilities not
 The entity expects to settle the classified as current liabilities are
liability within the entity’s normal classified as noncurrent liabilities”.
operating cycle. Examples of noncurrent liabilities are:
 The entity holds the liability  Noncurrent portion of long-term
primarily for the purpose of trading. debt
 The liability is due to be settled  Finance lease liability
within twelve months after the  Deferred tax liability
reporting period.  Long-term obligations to entity
 The entity does not have an officers
unconditional right to defer  Long-term deferred revenue
settlement of the liability for at
least for at least twelve months PAS 1, paragraph 69, simply states that
“when an entity presents current and
after the reporting period.
noncurrent liabilities as separate
classifications on the face of the statement
Presentation of current liabilities of financial position, it shall not classify
PAS 1, paragraph 54, provides that a deferred tax liability as currentliability.
minimum, the face of the statement of
financial position shall include the
following line items for current liabilities:
1. Trade and other payables
2. Current provisions
3. Short-term borrowing
4. Current portion of long-term debt
5. Current tax liability

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 Estimated liabilities
 Estimated liabilities are obligations which exist at the end of the reporting period although their amount
is notdefinite.
 Estimated liabilities may be classified either as current or noncurrent.
 Technically, an estimated liability may consist as a “provision” which is both probable and measurable.
 Common examples of estimated liabilities include estimated liability for premiums, estimated liability for
warranties and estimated liability under customer loyalty program.
Covenants
 If certain conditions relating to the borrower’s financial situation are breached, the liability becomes payable
on demand. In this case, PAS 1, paragraph 74, states that “such a liability is classified as current even if the
lender thus agreed, after the end of reporting period and before the statements is authorized for issue, not to
demand payment as a consequence of the breach”.
 Paragraph 75 states that the liability is classified as a noncurrent if the lender has agreed on or before the end
of reporting period to provide a grace period ending at least twelve months after the end ofreporting period.
Note: Grace period is a period within which the borrower can rectify the breach and during which the lender cannot demand immediate
payment.

Contingent liability
PAS 37, paragraph 10, defines a contingent liability in two ways:
 Contingent liability is a possible obligation that arises from a past event and whose existence will be confirmed
only by the occurrence or nonoccurrence of one or more uncertain future event not holly within the control of
the entity.
 A contingent liability is a present obligation that arises from past event but is not recognized because
it is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation OR the amount of the obligation cannot be measured reliably.
The uncertainty relating to future events can be expressed by a range of outcomes. The range of outcome may be
described as follows:
a. Probable – a future event is likely to occur. As a rule of thumb, probable means more than 50% likely.
b. Reasonably possible – a future event is less likely to occur.
c. Remote – the future event is least likely to occur or the chance of the future event occurring is very slight.

Treatment of contingent liability

 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.
 Thus, a contingent liability is either probable or measurable but not both. Contingent liability shall be disclosed
only.

The required disclosures are:

 Brief description of the nature of the contingent liability
 An estimate of its financial effects
 An indication of the uncertainties that exist.
 Possibility of any reimbursement

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

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SHAREHOLDER’S EQUITY
Shareholders’ equity or stockholders’ equity is the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities.

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 Appropriated Appropriation reserve
Revelation surplus Revaluation reserve
Treasury stock Treasury share

Share capital is the portion of the paid in capital representing the total par or stated value of the shares issued.
Subscribed share capital is the portion of the authorized share capital that has been subscribed to but not yet fully paid
and therefore still unissued.
Subscriptions receivable shall preferably be reflected as a deduction from the related subscribed share capital.
Note: Subscriptions receivable collectible within one year shall be classified as current assets.

Share premium is the capital contributed by the shareholders in excess of the par or stated value of the shares
subscribed to and issued.
Retained earnings represent the cumulative balance of periodic net income or loss, dividend distributions, prior period
errors, changes in accounting policy and other capital adjustments.
Retained earnings may be classified as unappropriated retained earnings and appropriated retained earnings.
 Unappropriated retained earnings represent that portion which is free and can be declared as dividends to the
shareholders.
 Appropriated retained earnings represent that portion which is restricted and therefore not available for any
dividend declaration.
A deficit is a debit balance in retained earnings. The deficit is not presented as an asset but as a deduction from
shareholders’ equity.

Line item – statement of financial position

PAS 1, paragraph 54, states that as a minimum, the face of the statement of financial position shall include line items
which present the following amounts:
1. Cash and cash equivalents
2. Financial assets (other than 1, 3 and 6)
3. Trade and other receivables
4. Inventories
5. Property, plant, and equipment
6. Investment in associates accounted for by the equity method.
7. Intangible assets
8. Investment property
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 9. Biological property
10. Total of assets classified as held for sale and assets included in disposal group classified as held for sale.
11. Trade and other payables
12. Current tax asset and liability
13. Deferred tax asset and liability
14. Provisions
15. Financial liabilities (other than 11 and 14)
16. Liabilities included in disposal group classified as held for sale
17. Noncontrolling interest
18. Share capital and reserves

The listing of the lines items is not exclusive. Paragraph 54 simply provides a list of items that are sufficiently different in
nature and function to warrant separate presentation on the face of the statement of financial position.

Paragraph 55 provides that additional line items, headings and subtotals shall be presented on the face of the statement
of financial position when such presentation is relevant to the understanding of the entity’s financial position. The
judgment on whether additional line items are presented separately is based on the assessment of the following:
 Nature and liquidity of assets
 Functions of assets within the entity
 Amount, nature, and timing of liabilities

Paragraph 57 of PAS 1 provides that “the standard does not prescribe the order or format in which items are to be
presented”.

In the Philippines, the common practice is to present in the statement of financial position current assets before
noncurrent assets, current liabilities before noncurrent liabilities, and equity after liabilities.

Other formats may be equally appropriate provided the distinction is clear. This is in accordance with paragraph 7 of the
Preface to PAS 1.

Note that the format of the statement of financial position as illustrated in the appendix to PAS 1 presents noncurrent
assets before current assets, equity before liabilities, and noncurrent liabilities before current liabilities.
This may be the practice in other jurisdictions, like the United Kingdom.

Forms of statement of financial position

The format of a statement of financial position is not specified in PAS 1. In practice, there are two customary forms in
presenting the statement of financial position namely:
 Report form – this form sets forth the three major sections in a downward sequence of assets, liabilities, and
equity.
 Account form – as the title suggests, the presentation follows that of an account, meaning, the assets are shown
on the left side and the liabilities and equity on the right side of the statement of financial position.

The statement of financial position is an expansion of the accounting equation “asset equals liability plus equity”.

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References:
 Statement of Financial Position Hand-outs, University of Saint Louis
 IAS 1 - Presentation of Financial Statements
 [Link]
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