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Statement of Financial Position Layman’s term – “properties owned”

Definition
A statement of financial position is a formal Economic Resource
statement showing the three elements comprising A right that has the potential to prude economic benefits.
financial position, namely:
1. Assets The essential characteristics of an asset
2. Liabilities 1. Controlled by the entity
3. Equity 2. Result of a past event
3. Has potential to produce economic benefits
Q1: Why do investors, creditors, and other statement Basically, assets come from:
users analyze the statement of financial position? Liability
o To evaluate such factors such as Asset
Equity
o Liquidity
o Solvency; and Current Asset
o The need of the entity for additional SUMMARY:
financing a. Cash and cash equivalent
b. Held for trading
Liquidity, defined c. Expected to be realized within twelve
The ability of the entity to meet currently maturing months
obligations.
d. Within the normal operating cycle
(realized,
Pas 1, paragraph 66 sold or consumed
Solvency, defined
The ability of cash over the longer term to meet When to know if an asset is current:
maturing obligation, a. Asset is cash or a cash equivalent unless
restricted to settle and liability for more than 12
Q2: Where do information about liquidity and solvency months after the reporting period.
being used? b. The entity holds the assets primarily for the
o Information about solvency and liquidity are purpose of trading
useful in predicting the ability of the entity to c. The entity expects to realize the asset within
comply with future financial commitments and twelve months after the reporting period.
to pay dividends to shareholders. Note: this is applicable for non-trade receivable.
Current and Non-current distinction Because if it is within the trade of the entity –
o PAS 1, paragraph 6 states: regardless of whether or not it exceeds 12
months, as long as it is within the normal
An entity shall present current and noncurrent
operating cycle, the asset is classified as current.
assets, current and noncurrent liabilities, as
d. The entity expects to realize the assets or intend
separate classifications in the statemen of
to sell or consume it within the entity’s normal
financial position.
operating cycle.
o Increasing or decreasing liquidity arrangement
e.g. trade receivable
provides information that is faithfully represented
and more relevant (applicable for some entities,
A. Cash and Cash equivalent
such as financial institution).
Includes:
- Cash on hand
Assets - Petty cash fund
- Cash bank
Definition - Any cash equivalent
An asset is a present economic resource controlled by
the entity as a result of past events (The Revised Q3: What is the basic rule for the cash and cash
Conceptual Framework). equivalent to be classified as current?
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- It should be unrestricted in use, meaning a. It is acquired principally for the purpose of
available anytime for the payment of current selling it in the near term
obligations b. On initial recognition, it is part of portfolio
Cash Equivalents, defined. which there is evidence of short-term profit
Short-term highly liquid investments that are readily taking
convertible into known amount of cash and which are c. Derivative, except derivatives as a guarantee
subject to an insignificant risk of change in value. contract and an effective hedging instrument.
Major rule: short-term maturity of three months or less
from the date of acquisition date. C. Expected to be realized
Refers to short-term NON-TRADE RECEIVABLES
Q4: Is a matured 3-year BSP treasury bill purchased 3
months ago a cash equivalent? Nontrade receivables, defined
- Yes. As long as the date of maturity is 3 months Represents claims arising from sources other than the
or less from the date or acquisition. sale or merchandize (inventory) or services in the
ordinary course of business.
Date of Acquisition 3 months or less Date of Maturity

Examples of Cash Equivalents within 12 mos. Current asset

1. 3-month BSP treasury bill Nontrade
2. 3-year BSP treasury bill receivables
purchased 3 months before the date of maturity beyond 12 mos. Non-current
3. 3-month time deposit
4. 3-month money market instrument
Note: as you notice, it doesn’t matter whether it is a 3- Q6: When to classify nontrade receivables as current?
month or 3 -year or 3-century financial instrument. What - If collectible within one year from the end of
is important is the date of purchase which should be 3 reporting period
months or less before maturity. - Notwithstanding, the length of normal operating
cycle
Q5: Can equity securities be classified as cash
equivalent? D. Realized, sold, or consumed
- No. because shares do not have a date of Refers to TRADE RECEIVABLES
maturity
- XPN: Preference Share with specified Q7: Are all inventory sold on account and collectible for
redemption date. 2 years can still be classified as current asset even if it
exceeds a year?
- Yes. As long as it is realized, sold, consumed
within the normal operating cycle of the
within 12 mos. Current asset
business.
Trade
receivables within the
current asset
NOC
beyond 12 Trade receivables are classified as current asset because
mos.
beyond the
NOC
non-current
asset
they are “expected” to be realized within one year or
normal operating cycle, whichever is longer.
Can qualify as cash equivalent because this is Operating Cycle, defined.
actually a financial liability in the POV of issuer Is the time between the acquisition of assets for
and a financial asset investment of the investor. processing and their realization in cash or cash
Plus, it has maturity, which is the redemption equivalent.
date. Trading Entity: Manufacturing Entity:

B. Held for Trading collection

of cash
A financial asset is classified as held for trading when: realizati
sell the
on of
inventory cash/CE

acquire acquisition of
merchandise material
inventory
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Presentation of Current Asset D. Machinery
o Usually listed in the balance sheet in the order or E. Ship
liquidity F. Aircraft
o Minimum line of item provided by PAS 1, par. G. Motor vehicle
54: H. Furniture and fixtures
1. Cash and cash equivalent I. Office equipment
2. Financial asset at fair value through profit or J. Patterns, molds and dies
loss K. Tools
3. Trade and other receivables L. Bearer plants
4. Inventories
5. Prepaid expense Bearer plants are living plants that is used
Noncurrent Assets
in the production or supply of agricultural
o Residual definition
produce and is expected to bear produce
o PAS 1, par. 66: an entity shall classify all other
for more than one period and has a
assets not classified as current as noncurrent
remote likelihood of being sold.
assets.
o Example of noncurrent assets: B. Long-term Investments
A. Property, plant and equipment Investment, defined
B. Long-term investment An asset held by an entity for the accretion of wealth 1.
C. Intangible assets through capital distribution such as:
D. Other noncurrent assets - Interest
E. Deferred tax asset - Royalties
- Dividends
PAS 1, par. 56 provides that DTA - Rentals
is classified as noncurrent asset. 2. Through capital appreciation or for other benefits to
the investing entity such as those obtained through
DTA= future deductible amount
trading relationship (International Accounting Standard
+ operating loss carryover
A. Property Plant and Equipment Committee)
Definition
PAS 16, par. 6 defines PPE as; Investment Classification
1. Tangible assets (meaning with physical Investment Criteria
Current Investment that is by nature:
substance)
- Readily realizable; and
2. Used in business and rental purposes and for - Intended to be held for not
administrative more than one year
3. Expected to be used over a period of more than a Noncurrent Other than a current investment or
year. investment intended to be held for
more than one year
Q8: Does land held for capital appreciation be classified Example of long-term investment
as Property, Plant and Equipment? 1. Investment in shares and bonds
- No. this is classified as Investment property 2. Investment in subsidiaries
3. Investment in associates
Q9: Does land held by an estate broker for sale in the 4. Investment in funds:
ordinary course of the business be classified as PPE? a. sinking fund
- No. Inventory. b. plant expansion fund
c. Preference share redemption fund
Examples of Property, Plant and Equipment 5. Investment property
A. Land 6. Cash surrender value of life insurance policy
B. Land improvement 7. Investment in joint ventures
C. Building
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C. Intangible Assets o Not necessary that the payee or the
Definition: entity to whom the obligation is owed be
An identifiable nonmonetary asset without physical identified
substance. 2. The obligation is to transfer an economic
resource.
Essential Criteria o The very heart of the definition of
Criteria Meaning liability
1. Identifiably To be identifiable: o Mode of payment: cash, transfer
a. Separable; and noncash asset, provide service
b. arises from 3. The liability arises from the past
contractual/ other legal
o This means not recognize until it is
rights
incurred.

2. Control - Risk and rewards Current Liabilities

- Stems from legal right
Is one that is likely:
3. Future economic Revenue and cost savings
benefit a. to be settled within the normal operating cycle;
or
b. twelve months after balance sheet date
Example of Intangible Assets c. held for trading purposes
Identifiable Unidentifiable d. the entity does not have unconditional right to
1. Patents 1. Goodwill defer settlement for at least twelve months after
2. Copyright
the balance sheet date
3. Trademarks/
brandname Note: an entity shall classify all other liability not
4. Franchise classified as current as noncurrent.
5. Computer software
6. Broadcasting license, Q10: Trade Payables payable within 3 years is classified
airline right, and as?
fishing right - Current liability. Because it is part of the normal
operating cycle. Therefore, even if they are to be
D. Other noncurrent asset settled more than twelve months after the end of
Definition the reporting period – they are still current.
Those assets that do not fit into the definition of the Q11: Nontrade Payables payable within 6 months is
previously (a-c) mentioned noncurrent assets classified as?
- Current liability. Nontrade payables are NOT
Examples within the normal operating cycle and therefore
1. Long-term advances to officers, directors, the 12-month rule is mandatory to be classified
shareholders and employees as current.
2. Abandoned property; and
3. Long-term refundable deposit Examples of Current Liabilities
1. Trade receivables and accrual for employee and

Liabilities other operating cost are part of the entity’s

normal operating cycle.
Definition 2. Obligation that are not part of the normal
A present obligation of an entity to transfer an economic operating cycle but are due for settlement within
resource as a result of past events. the twelve months after the end of the reporting
period.
Essential characteristics Examples:
1. The entity has a present obligation
o Entity liable must be identified 1. Bank overdraft
2. Dividends payable
3. Income taxes
4. Other nontrade payable; and
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Q13: What will happen if certain conditions relating to
the borrower’s financial situation are breached?
- The liability becomes payable on demand.

Q14: what if after the breach, the lender and the

3. Financial liabilities held for trading borrower have agreed to that AFTER the end of the
reporting period and BEFORE are authorized to issue
Example:
not to demand payment as a consequence of breach?
Quoted debt
- Such liability instrument
is STILL that theasissuer
classified may
CURRENT
buy
(PAS 1, back
par. in the near future depending on the
74).
changes in fair value.
Q15: What if before the end of reporting period the
lender has agreed to provide a grace period ending at
least twelve months after the reporting period?
Long-term debt currently maturing - Continue to be classified as NONCURRENT.
GR: classified as current liability.
Even if: Illustration: Breach of Covenants
a. The original term was for a period longer than XPN: Non-current (when
grace period is given GR: Current Liability
12 months (payable on demand)
b. An agreement to refinance or reschedules
BREACH
Start of reporting Period End of reporting Period Issuance of Financial
payment on long-term basis is completed: Statement
o AFTER the end of reporting period
o BEFORE the financial statements are Note:
authorized for issue General rule: when covenant is breached the liability
becomes payable on demand (current)
Illustration: Refinancing of currently maturing long-term Exception: when there the lender gives grace period on
debt or before the end of reporting period.
Refinancing:
Refinancing: CURRENT Q16: What if the grace period is given after the reporting
Non-current XPN: has discretion (noncurrent)
period?
- Current liability.
Start of reporting Period End of reporting Period Issuance of Financial
Statement
Grace period, defined
Discretion to Refinance A period within which the borrower can rectify the
Q12: If the entity has the discretion to refinance or roll breach and during which the lender cannot demand
over an obligation for at least twelve months after the immediate payment.
reporting period, the obligation is classified as?
- Noncurrent liability even if it would otherwise Presentation of Current Liabilities
be due within a shorter period. Minimum presentation in the face of balance sheet:
a. Trade and other payables
Note: the refinancing or rolling over must be at the b. Current provision
discretion of the entity. Otherwise, CURRENT. c. Short-term borrowing
d. Current portion of long-term debt
Covenants e. Current tax liability
Definition Consist of: (trade and nontrade)
Restrictions on the borrower as to undertaking further - Accounts payable
borrowings, paying dividends, maintaining specified - Notes payable
level of working capital and so forth. - Accrued interest on notes payable
Noncurrent
- Liabilities
Dividends payable
- Accrued expense
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o The term noncurrent is a residual definition o Not probable but possible
Examples of Noncurrent: o Obligation cannot be measured reliably.
1. Noncurrent portion of long-term debt
2. Lease liability Range of outcome
3. Long-term obligations to entity officers Range of Outcome
4. Long-term deferred revenue Probable >50%
5. Deferred Tax Liability The future event is likely to occur
Future taxable income x income tax rate Possible <50%; >10%
Remote ≤10%
Least likely to occur
Working Capital
Definition
Treatment of Contingent Liability
A financial metric which represents operating liquidity
Treatment
available to a business; part of operation capital.
Probable Recognition
Possible Disclosure
Formula Remote No disclosure, no recognition
Working Capital= Current assets – current liabilities
Disclosure requirement
Current assets a. Brief nature description of the contingent
WC Ratio=
Current liability liability
b. Estimate of the financial effect
Estimated Liabilities c. Indication of the uncertainties that exist
Definition d. Possibility of any reimbursement
Obligations which exist at the end of reporting period
although the amount is not definite; payee in some Contingent Asset
instances cannot be identified or determined. - Possible asset
- Arises from past event
Common examples: - Existence will be confirmed only by the
1. Estimated liability for premiums occurrence or nonoccurrence of one or more
2. Estimated liabilities for warranties uncertain future events not wholly within the
3. Estimated liabilities for customer loyalty control of the entity.
program. Example:
Claim that an entity through legal process.
Classification General rule: not recognize, because this may result to
- Current or noncurrent recognition of income that may never be realized
(conservatism)
Contingent Liabilities
- “possible” present obligations Exception: when the realization of income is virtually
- Either: could be “probable” or “measurable” but certain. Therefore, contingent asset is no longer asset.
not both.
Note: if both probable and measurable – not a Treatment of Contingent Asset
contingent liability and therefore recognize in Treatment
balance sheet. Probable Disclosure
- Arises from past event Possible No disclosure, no recognition
- Existence will be confirmed only by the Remote No disclosure , no recognition
occurrence or nonoccurrence of one or more
uncertain future events not wholly within the
control of the entity. Equity
Q17: is contingent liability recognized in balance sheet? o Equity= asset – liability
- No, only disclosure. Because: o Net asset
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Changes in Equity
Increased Decreased
Profitable operation Unprofitable operations
Contribution by owner Distributions to owners

Equity Terms
Sole Proprietorship Owner’s equity
Partnership Partners’ equity
Corporation Shareholders’ equity