FINANCIAL ACCOUNTING & REPORTING 3

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Statement of financial position

Module 007 Week003- FinAcct3 Statement of

Financial Position
The statement of financial position, sometimes referred to as the balance
sheet, reports the assets, liabilities, and stockholders’ equity of a business
enterprise at a specific date. This financial statement provides information
about the nature and amounts of investments in enterprise resources,
obligations to creditors, and the owners’ equity in net resources. It therefore
helps in predicting the amounts, timing, and uncertainty of future cash flows.
By providing information on assets, liabilities, and stockholders’ equity, the
statement of financial position provides a basis for computing rates of return
and evaluating the capital structure of the enterprise. Analysts also use
information to assess a company’s risk and future cash flows. In this regard,
analysts use the statement of financial position to assess a company’s
liquidity, solvency, and the need for additional financing.
Current assets are 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. They are presented in the statement of financial position in order of
liquidity. Although a current asset is well defined, certain theoretical
problems also develop. For example, how is including prepaid expenses in
the current assets section justified? The rationale is that if a company did not
pay these items in advance, it would instead need to use other current assets
during the operating cycle. Noncurrent assets, on the other hand, are those
not meeting the definition of current assets.
At the end of this module, you will be able to:
1. Define the statement of financial position
2. Identify the information needed to be presented on the face of the
statement of financial position
3. Explain the current and non-current distinction in the statement of
financial position
4. Understand the definition and essential characteristics of an asset

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Statement of financial position

Definition of statement of financial position

A statement of financial position is a formal statement showing the three elements

comprising financial position namely assets, liabilities and equity.
Investors, creditors and other primary users analyze the statement of financial position to
evaluate such factors as liquidity, solvency and the need of the entity for additional
financing.
Information about priorities and payment requirements of existing claims can help users to
predict how future cash flows will be distributed among those with a claim against the
entity.
In other words, information about liquidity and solvency is useful in predicting the ability
of the entity to comply with its future commitments.
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 classifications in the statement of
financial position except when a presentation based on liquidity provides information that
is reliable and more relevant. When that exception applies, an entity shall present all assets
and liabilities in order of liquidity.
Whichever method of presentation is adopted, an entity shall disclose the amount expected
to be recovered or settled after more than twelve months for each asset and liability line
item that combines amounts expected to be recovered or settled:
a) no more than twelve months after the reporting period, and
b) more than twelve months after the reporting period.
When an entity supplies goods or services within a clearly identifiable operating cycle,
separate classification of current and non-current assets and liabilities in the statement of
financial position provides useful information by distinguishing the net assets that are
continuously circulating as working capital from those used in the entity's 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.

Information to be presented on the face of the statement of financial position

PAS 1, paragraph 54, states that as a minimum, the statement of financial position shall
include line items:
a) cash and cash equivalents;
b) financial assets (other than a, c and f);
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c) trade and other receivables;

d) inventories;
e) property, plant and equipment;
f) investment in associates using the equity method;
g) intangible assets;
h) investment property;
i) biological assets;
j) the total of assets classified as held for sale and assets included in disposal groups
classified as held for sale;
k) trade and other payables;
l) current tax asset and liability;
m) deferred tax asset and deferred tax liability;
n) provisions;
o) financial liabilities (other than k and n);
p) liabilities included in disposal groups classified as held for sale;
q) non-controlling interests; and
r) issued capital and reserves attributable to owners.
The listing of the line items is not exclusive.
The list simply provides a list of items that are sufficiently different in nature and function
to warrant separate presentation on the face of statement of financial position.
Paragraph 55 provides that additional line items, heads and subtotals shall be presented on
the face of the statement of financial position when such presentation is relevant to the
understanding of the financial position of an entity.
The judgement on whether additional line items are presented separately is based on the
assessment of the following:
a) Nature and liquidity of assets
b) Function of assets within the entity
c) Amount, nature and timing of liabilities

Definition of assets

An asset is defined as “a resource controlled by the entity as a result of past event and from
which future economic benefits are expected to flow to the entity”.
The essential characteristics of an asset are:
a) The asset is controlled by the entity.
b) The asset is the result of a past event.
c) The asset provides future economic benefits.
d) The cost of the asset can be measured reliably.

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Statement of financial position

Assets can be classified as either current or noncurrent.

Current assets

PAS 1, paragraph 66, provides that an entity shall classify an 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 intends to sell or consume it within the
entity’s normal operating cycle.
The operating cycle of an entity is the time 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, it is assumed to be twelve months.
The normal operating cycle is significant as it is the basis of determining the proper
classification of assets into either current or noncurrent.
Current assets include assets (such as inventories and trade receivables) that are sold,
consumed or realized as part of the normal operating cycle even when they are not expected
to be realized within twelve months after the reporting period. Current assets also include
assets held primarily for the purpose of trading (examples include some financial assets
classified as held for trading in accordance with IAS 39) and the current portion of non-
current financial assets.
Cash and cash equivalents
This category includes cash on hand, petty cash find, cash in bank and any cash equivalent.
However, the cash and cash equivalent shall be unrestricted in use, meaning available
anytime for the payment of current obligations.
PAS 7, paragraph 6, defines “cash equivalents as short-term, highly liquid investments that
are readily convertible into known amount of cash and which are subject to an insignificant
risk of changes in value.”
Therefore, an investment normally qualifies as a cash equivalent only when it has a short
maturity of three months or less from the date of acquisition.
Examples of cash equivalents are:
a) Three-month BSP treasury bill
b) Three-year BSP treasury bill purchased three month before date of maturity

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c) Three-month time deposit

d) Three-month money market instrument
Held for trading
Appendix A of PFRS 9 provides that a financial asset is classified as held for trading when:
a) It is acquired principally for the purpose of selling it in the near term
b) On initial recognition, it is part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent actual pattern of
short-term profit taking
c) It is a derivative, except for a derivative that is a financial guarantee contract or a
designated and an effective hedging instrument.
Held for trading or trading securities are debt and equity securities that are purchased with
the intent of selling them in the “near term” or very soon in order to generate short-term
gains or profits.
Expected to be realized within twelve months
This category refers to short-term nontrade receivables.
Nontrade receivables represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of business. They are classified as current
assets if collectible within one year from the end of reporting period, the length of the
operating cycle notwithstanding.
Realized, sold or consumed
This category refers to trade receivables, inventories and prepayments.
These assets are classified as current because they are expected to be realized, sold or
consumed within the normal operating cycle or one year, whichever is longer.
Presentation of current assets
Current assets are usually listed in the statement of financial position in the order of liquidity.
PAS1, 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
c) Trade and other receivables
d) Inventories
e) Prepaid expenses

Noncurrent assets

The term “noncurrent assets” is a residual definition.

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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
PAS 1, paragraph 56, provides that ‘when an entity presents current and noncurrent assets
as separate classifications on the face of the statement of financial position, it shall not
classify deferred tax assets as current assets.”
Property, plant and equipment
PAS 16, paragraph 6, defines property, plant and equipment as “tangible assets which are
held by an entity for use in production or supply of goods and services, for rental to others,
or for administrative purposes, and are expected to be used during more than one period.”
Examples of property, plant and equipment include land, building, machinery, ship, aircraft,
motor vehicle, furniture and fixtures, office equipment, patterns, molds and dies, tools,
leasehold improvement and book plates.
The old term for property, plant and equipment is “fixed assets”.
Most property, plant and equipment, except land, are presented at cost less accumulated
depreciation.
Property, plant and equipment are listed first under noncurrent assets because very often
these represent a major portion of total assets and therefore are significant in the
presentation of financial position.
Long-term investments
Investment is defined as “an asset held by an entity for the accretion of wealth through
capital distribution, such as interest, royalties, dividends and rentals, for capital appreciation
or for other benefits to the investing entity such as those obtained through trading
relationship.”
An investment may be current or noncurrent.
A current investment is an investment that is by nature readily realizable and is intended to
be held for not more than one year.
A noncurrent or long-term investment is an investment other than a current investment or
investment intended to be held for more than one year.
Some examples of long-term investments are:
1. Investments in securities of other entities

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2. Investments in subsidiaries
3. Investments in associates accounted for by the equity method
4. Investments in funds accumulated for a particular purpose, such as sinking fund,
plant expansion fund and preference share redemption fund
5. Investment property
6. Cash surrender value of life insurance policy
7. Investment in joint venture
Intangibles
PAS 38, paragraph 8, simply defines an intangible asset as follows:
“An intangible asset is an identifiable nonmonetary asset without physical substance.”
It further states that “the intangible asset must be controlled by the entity as a result of past
event and from which future economic benefits are expected to flow to the entity.”
Intangible assets do not have physical substance but are expected to provide future
economic benefits to the entity.
PAS 38, paragraph 12, provides that an intangible asset is identifiable:
a) When it is separable or capable of being sold, transferred, licensed, rented or
exchanged separate from the entity.
b) When it arises from contractual or other legal right.
The common examples of identifiable intangible assets include patent, franchise, copyright,
lease rights, trademark and computer software.
An example of an unidentifiable intangible asset is goodwill.
Other noncurrent assets
Other noncurrent assets are those assets that do not fit into the definition of the previously
mentioned noncurrent assets.
Examples of other noncurrent assets include long-term advances to officers, directors,
shareholders and employees, or abandoned property and long-term refundable deposit.

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References and Supplementary Materials

Books and Journals

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 3; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 1; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield; 2013; Intermediate Accounting;

United States; John Wiley & Sons, Inc.

Online Supplementary Reading Materials

IAS 1 Presentation of Financial Statements; http://www.ifrs.org/issued-standards/list-
of-standards/ias-1-presentation-of-financial-statements/; October 30, 2017

IAS 16 Property Plant and Equipment; http://www.ifrs.org/issued-standards/list-of-

standards/ias-16-property-plant-and-equipment/; October 30, 2017

IAS 38 Intangible Assets; http://www.ifrs.org/issued-standards/list-of-standards/ias-38-

intangible-assets/; October 30, 2017

IAS 2 Inventories; http://www.ifrs.org/issued-standards/list-of-standards/ias-2-

inventories/; October 30, 2017

IFRS 9; http://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-financial-
instruments/; October 30, 2017

IAS 39 Financial Instruments: Recognition and Measurement;

http://www.ifrs.org/issued-standards/list-of-standards/ias-39-financial-instruments-
recognition-and-measurement/; October 30, 2017

Online Instructional Videos

Balance Sheet and Income Statement Relationship;
https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-
financial-stateme/financial-statements-tutorial/v/balance-sheet-and-income-statement-
relationship; January 10, 2018

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Statement of financial position

Financial Statements- Lecture 7- The Statement of Financial Position- IFRS;

https://www.bing.com/videos/search?q=statement+of+financial+position&&view=detail
&mid=60F5FC3563CF3AF4537C60F5FC3563CF3AF4537C&FORM=VRDGAR; January 10,
2018

Statement of Financial Position;

https://www.bing.com/videos/search?q=statement+of+financial+position&&view=detail
&mid=9B6C89069BFCB356AA209B6C89069BFCB356AA20&FORM=VRDGAR; January 10,
2018

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