STATEMENT OF

FINANCIAL
POSITION
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 statement users analyze
the statement of financial position to evaluate such
factors as
liquidity, solvency and the need of the entity for
additional financing..
Statement of Financial Position

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. Information about liquidity and
solvency is useful in predicting the ability of the entity to
comply with future financial commitments and to pay
dividends to shareholders.
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.

When an entity supplies goods or services within a

clearly identifiable operating cycle the separate
classification of current and noncurrent assets and
liabilities is a useful information.
Current and Noncurrent distinction

It 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.
Assets

The Revised Conceptual Framework defines an asset as

a present economic resource controlled by the entity as
a result of past events.

An economic resource is a right that has the potential to

produce economic benefits.
Assets

In layman's language and in short, assets are

properties owned. 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 has the potential to produce economic
benefits.
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 to settle a liability for more than 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.
Cash and Cash Equivalents

This category includes cash on hand, petty cash fund,

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.
Cash and Cash Equivalents

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

a. Three-month BSP treasury bill

b. Three-year BSP treasury bill purchased three months
before date of maturity
c. Three-month time deposit
d. Three-month money market instrument
Examples of cash equivalents

Note that what is important is the

date of purchase which should be three months or less
before maturity.

Thus, a BSP treasury bill that was purchased

three years ago cannot qualify as each equivalent even if
the remaining maturity is three months or less.
Examples of cash equivalents

Equity securities cannot qualify as cash equivalent

because shares do not have a date of maturity.

However, preference shares with specified redemption

date
and acquired three months before redemption date can
qualify equivalents.
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 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

Simply stated, financial assets 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. Nontrade receivables
are classified as current assets if collectible within one
year from the end of reporting period, the length of the
operating cycle not withstanding

Otherwise, the nontrade receivables are classified as

noncurrent assets.
Realized, sold or consumed

This current asset category refers to trade receivables,

inventories and prepayments.

These assets are classified as current assets because

they are expected to be realized, sold or consumed
within the normal operating cycle or one year, whichever
is longer.
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 normal operating cycle is not clearly,

identifiable, the duration is assumed to be twelve
months.
Operating cycle

The operating cycle of a trading entity is the average

period of time that it takes to acquire the merchandise
inventory, sell the inventory to customers and ultimately
collect cash from the sale.

The operating cycle of a manufacturing entity is defined

as the period of time between acquisition of materials
entering into a process and their realization in cash or an
instrument that is readily convertible into cash.

The normal operating cycle is significant as it is the basis

of determining the proper classification of assets into
either current or noncurrent.
Presentation of current assets

Current assets are usually listed in the statement of

financial position in the order of liquidity.

PAS 1, paragraph 54 provides that as a minimum the

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

The caption noncurrent assets is a residual definition.

PAS 1, paragraph 66, simply states that " an entity shall

classify all other assets not classified as current as
noncurrent assets''.
Noncurrent assets

In other words, what is not included in the definition of

current assets is deemed excluded.

All others are classified 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 deferred tax asset is

classified as noncurrent asset.
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".
Property, Plant and Equipment

Examples of property, plant and equipment:

• Land • Motor vehicle
• Land improvement • Furniture and fixtures
• Building • Office equipment
• Machinery • Patterns, molds and dies
• Ship • Tools
• Aircraft • Bearer plants
Long-term investments

The International Accounting Standards Committee

defines investment 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 relationships “.
Examples of Long-term investments

• Investments in shares
• Investments in bonds
• Investments in subsidiaries
• Investments in associates
• Investments in funds such as sinking fund, plant
expansion fund and preference share redemption fund
• Investment property
• Cash surrender value of life insurance policy
• Investment in Joint venture
Intangible assets

An intangible asset is simply defined as an identifiable

nonmonetary asset without physical substance.

The common examples of identifiable intangible assets

include patent, franchise, copyright, lease right,
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.
Current liabilities

PAS 1, paragraph 69, provides that an entity shall classify

a liability as current when:
a. 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 twelve
months after the reporting period.
Examples of Current liabilities

a. Trade payables and accruals for employee and other

operating costs are part of the working capital used in
the entity's normal operating cycle. Such operating items
are classified as current liabilities even if they are settled
more than twelve months after the end of reporting
period.

b. Obligations that are not settled as part of the normal

operating cycle but are due for settlement within twelve
months after the end of reporting period. Examples of
such current obligations are bank overdraft, dividends
payable, income taxes other nontrade payable and
current portion of noncurrent financial liabilities.
Examples of Current liabilities

c. Financial liabilities held for trading are financial

liabilities that are incurred with an intention to
repurchase them in the near term.
Long-term debt currently maturing

a. The original term was for a period longer than twelve

months.
b. An agreement to refinance or to reschedule payment
on a long-term basis is completed
After the end of reporting period and before the financial
statements are authorized for issue.
Right to Defer settlement

PAS 1, paragraph 73, provides that if the entity has the

Discretion to refinance or roll over an obligation for at
least twelve months after the reporting period under an
existing loan facility, the obligation is classified as
noncurrent even if it would otherwise be due within a
shorter period. Note that the refinancing or rolling over
must be at the discretion of the entity.

Otherwise, if the refinancing or rolling over is not at the

discretion of the entity, the obligation is classified as a
current liability.
Covenants

Covenants are often attached to borrowing agreements

which represent undertakings by the borrower.

These covenants are actually restrictions on the

borrower as to undertaking further borrowings, paying
dividends, maintaining specified level of working capital
and so forth.

Under these covenants, if certain conditions relating to

the borrower's financial situation are breached, the
liability becomes payable on demand.
.
Covenants

PAS 1, paragraph 74, states that such a liability is

classified as current even if the lender has agreed, after
the end of reporting period and before the statements
are authorized for issue, not to demand payment, as a
consequence of the breach.
demand immediate payment.
Covenants

However, Paragraph 75 states that the liability is

classified as 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 of
reporting period.

In this context, the grace period is a period within which

the borrower can rectify the breach and during which the
lender cannot demand immediate payment.
Presentation of Current liabilities

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

face of the statement of financial position shall include
the following line items for current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
Presentation of Current liabilities

The term "trade and other payables" is a

line item for accounts payable, notes payable, accrued
interest on note payable, dividends payable and accrued
expenses.

No objection can be raised if the trade accounts and

notes payables are separately presented.
Noncurrent liabilities

The term non-current liabilities is a residual definition.

PAS 1, paragraph 69, simply states that all liabilities not

classified as current liabilities are classified as
noncurrent.
Examples of Noncurrent liabilities

a. Noncurrent portion of long-term debt

b. Lease liability
c. Deferred tax liability
d. Long-term obligations to entity officers
e. Long-term deferred revenue

PAS 1, paragraph 56, provides that deferred tax liability is

classified as noncurrent liability.
Working Capital

The entity's liquidity is of primary concern to most

statement users and this can be properly evaluated
through the current and noncurrent classifications.

For example, working capital is the excess of current

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

The term equity is the residual interest in the assets of

the entity after deducting all of the liabilities.

Simply stated, equity means net assets or, total assets

minus liabilities.

Equity is increased by profitable operations and

contributions by owners.

Conversely, equity is decreased by unprofitable

operations and distribution to owners.
Shareholders’ 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.

Generally, the elements constituting shareholders' equity

with their equivalent IAS term are:
Shareholders’ Equity
Line Items of Statement of Financial Position

PAS 1, paragraph 54, states that as a

minimum, the statement of financial position shall
include the following line items:
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 using the equity method
7. Intangible assets
8. Goodwill
9. Investment property
10. Biological Assets
Line Items of Statement of Financial Position

11. Total of assets classified as held for sale and assets

included in disposal group classified as held for sale
12. Insurance contracts and reinsurance contracts
considered assets
13. Trade and other payables
14. Current tax asset and liability
15. Deferred tax asset and deferred tax liability
16. Provisions
17. Financial Liabilities
18. Liabilities included in disposal group held for sale
19. Insurance contracts and reinsurance contracts
considered liabilities
20. Non controlling interest
21. Share capital and reserves
The listing of line of the line 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
financial position of an entity.
The listing of line of the line items is not
exclusive
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. Function of assets within the entity
c. Amount, nature and timing of liabilities
Format of statement of financial position

The format of a statement of Financial position is not

specified in IFRS 18.

IFRS 18, paragraph 11, provides that an entity may use

the title “balance sheet” instead of the title used in the
standard “statement of financial position” .

IDRS 18, paragraph 106, provides that the standard does

not prescribe the order or format in which line items are
to be presented.
Format of statement of financial position

Under Philippines jurisdiction, the common practice is to

present in the statement of financial position the
following format:

Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Equity

Other formats may be equally appropriate provided the

distinctions is clear.
Format of statement of financial position

The format of the statement of the financial position in

the presentation and disclosures in financial statements
is in the following order.

Noncurrent assets
Current assets
Equity
Noncurrent liabilities
Current liabilities

The above format may be the practice in other

jurisdiction, like the United Kingdom.