Week 002

Statement of
Financial Position
Week 002: Statement of Financial Position

Learning Targets
1. Know the objectives of financial
statements
2. Identify the components of the
statement of financial position
3. Prepare the statement of financial
position
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Week 002: Statement of Financial Position

The Statement of Financial Position

(Balance Sheet)
Week 002: Statement of Financial Position

The Statement of Financial Position

The financial position of an enterprise is affected by the economic resources it
controls, its financial structure, its liquidity and solvency, and its capacity
to adapt to changes in the environment in which it operates. The balance
sheet presents this kind of information.

Liquidity is the ability of the entity to meets currently maturing obligations.

Solvency is the availability of cash over the longer term to meets maturing
obligations
Week 002: Statement of Financial Position

Classification of Current vs Non Current

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.
➢ 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.
Week 002: Statement of Financial Position

ASSETS:
➢ Assets are defined as “resources controlled by the entity as result of past
transactions and events and
from 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 transactions or event.
https://cdn-icons-
C. The asset provides future economic benefits. png.flaticon.com/512/1907/1907675.png; May 11,
2022.
D. The cost of the assets can be measured reliably.
Week 002: Statement of Financial Position
PAS1, paragraph 66, provides that an entity shall
CURRENT ASSETS: 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 within the entity’s normal operating cycle.
e) 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
Week 002: Statement of Financial Position
PAS1, paragraph 66, provides that an entity shall
NON CURRENT ASSETS: classify as asset as non current when:

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
Note: 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”.
Week 002: Statement of Financial Position

CONTINGET ASSETS:
➢ 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.
➢ An example is a claim that an entity is pursuing through legal
processes when the outcome is uncertain. https://www.pinclipart.com/picdir/big/412-
4126015_complete-asset-management-solutions-
for-all-kinds-of.png; May 11, 2022.
Week 002: Statement of Financial Position

INTANGIBLE ASSETS
PAS 38, paragraph 8, simply defines an intangible asset as follow:

“An intangible asset is an identifiable nonmonetary asset

without physical substance”

Paragraph 8 further states that: Intangible assets must be

controlled by the entity as a result of past event and from which
https://leewardcapitalmgt.com/wp-content/uploads/2019/03/ip-
future economic benefits are expected to flow to the entity. incons-white-background.png; May 11, 2022.

Intangible assets do not have physical substance but are

expected to provide future economic benefits to the entity.
Week 002: Statement of Financial Position

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.

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Week 002: Statement of Financial Position

LIABILITIES
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 as 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. https://cdn-icons-png.flaticon.com/512/2845/2845552.png;
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Week 002: Statement of Financial Position

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 for at
least twelve months after the reporting period.
Week 002: Statement of Financial Position

NON CURRENT LIABILITIES

The term “noncurrent liabilities” is also a residual definition.

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
Week 002: Statement of Financial Position

ESTIMATED LIABILITIES

➢ Estimated liabilities are obligations which exist at the end of

reporting period although their amount is not definite.
➢ Estimated liabilities may be classified either as current or
noncurrent.
➢ Technically, an estimated liability may be consisted as a
“provision” which is both probable and measurable.
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Week 002: Statement of Financial Position

Covenants

➢ If certain conditions relating to the borrower’s financial

situation are breach, 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”.
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Week 002: Statement of Financial Position

Nonadjusting events
➢ PAS 1, paragraph 76, provides that which respect to loans classified as current liabilities, the following
events occurring between the end of reporting period and the date the financial statements are
authorized for issue would qualify for disclosure a nonadjusting events, meaning, the loans remain as
current liabilities:

a) Refinancing on long-term basis

b) Rectification of a breach of long-term loan agreement
c) The receipt from the lender of a grace period ending at least
twelve months after the end of reporting period
Week 002: Statement of Financial Position

Contingent Liability
PAS 37, paragraph 10, defines a contingent liability in two ways:

➢ A contingent liability is a possible obligation that arises from 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.
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. https://evgfunding.com/wp-
content/uploads/2018/05/Evergreen-
Manufacturing-icon-1.png; May 11, 2022.
Week 002: Statement of Financial Position

EQUITY / Net Assets

➢ Simply stated, equity means “net assets” or
total assets minus liabilities.
➢ Equity is increased by profitable operations
and contribution by owners.
➢ Conversely, equity is decreased by
unprofitable operations and distribution to
owners. https://cdn-icons-png.flaticon.com/512/2590/2590464.png;
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Week 002: Statement of Financial Position

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

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Week 002: Statement of Financial Position

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:

a. Report form – this form sets forth the three major sections in a down ward
sequence of assets, liabilities and equity.
b. Account form – as the title suggests, the presentation follows that of an
account, meaning, the assets are shows on the left side and the liabilities and
equity on the right side of the statement of financial position
Week 002: Statement of Financial Position

Sample financial position:

Account form:

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2022.
Week 002: Statement of Financial Position

Sample financial position:

Report form:

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May 11, 2022.

References

• Millan, Z. V. (2022). Intemediate Accounting 3. Bandolin Publishing House.

• Nenita Robles, & Empleo, P. (2019). The Intermediate Accounting Volume 1.
Millennium Books, Inc.
• Valix, C., Peralta, J., & Valix, C. (2020). Intermediate Accounting Volume 3. GIC
Enterprises & Co., Inc.