The Statement of Financial Position

The Statement of Financial Position

The financial position of an enterprise is influenced 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 statement of financial
position, commonly known as the balance sheet, presents this information.
Liquidity refers to the entity’s ability to meet currently maturing obligations. Sol-
vency refers to the availability of cash over the longer term to meet maturing
obligations.

Assets
Assets are defined as resources controlled by the entity as a result of past transac-
tions or events, from which future economic benefits are expected to flow to the
entity. In simpler terms, assets are properties owned by the entity.
The essential characteristics of an asset are:
A. The asset is controlled by the entity.
B. The asset results from a past transaction or event.
C. The asset provides future economic benefits.
D. The cost of the asset can be measured reliably.

Noncurrent Assets
According to PAS 1, paragraph 66, an entity shall classify an asset as noncurrent
when it is not classified as a current asset. Noncurrent assets include:
a. Property, plant, and equipment
b. Long-term investments
c. Intangible assets
d. Other noncurrent assets
Note: PAS 1, paragraph 56, specifies that deferred tax assets shall not be classified
as current assets when an entity presents separate classifications on the face of

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the statement of financial position.

Current Assets
According to PAS 1, paragraph 66, an entity shall classify an asset as current when:
a. The asset is cash or a cash equivalent, unless it is restricted from being ex-
changed or used to settle a liability for at least twelve months after the re-
porting 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 report-
ing period.
d. The entity expects to realize, sell, or consume the asset within the entity’s
normal operating cycle.
Current assets are typically listed in the statement of financial position in the order
of liquidity. According to PAS 1, paragraph 54, the minimum line items under
current assets include:
• Cash and cash equivalents
• Financial assets at fair value (e.g., trading securities and other investments
in quoted equity instruments)
• Trade and other receivables
• Inventories
• Prepaid expenses

Classification of Current vs. Noncurrent Assets

PAS 1, paragraph 60, requires an entity to present current and noncurrent assets,
and current and noncurrent liabilities, as separate classifications in the statement
of financial position. However, an entity may present all assets and liabilities in
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. This distinguishes net assets that continuously circulate as working capital
from those used in long-term operations.

Contingent Assets
According to PAS 37, paragraph 10, a contingent asset is a possible asset that
arises from past events and whose existence will be confirmed only by the occur-
rence or nonoccurrence of one or more uncertain future events not wholly within
the control of the entity. Contingent assets typically arise from unplanned or un-
expected events that may result in an inflow of economic benefits, such as a claim
pursued through legal processes with an uncertain outcome.

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Intangible Assets
According to PAS 38, paragraph 8, an intangible asset is an identifiable nonmon-
etary asset without physical substance. It must be controlled by the entity as a
result of a past event, and future economic benefits are expected to flow to the
entity. Intangible assets lack physical substance but are expected to provide fu-
ture economic benefits.

Liabilities
Liabilities are defined as present obligations of an entity arising from past trans-
actions or events, the settlement of which is expected to result in an outflow of
resources embodying economic benefits.
The essential characteristics of liabilities are:
A. The liability is a present obligation of a specific entity.
B. The liability arises from a past transaction or event and is not recognized
until incurred.
C. The settlement of the liability requires an outflow of resources embodying
economic benefits.

Current Liabilities
According to PAS 1, paragraph 69, an entity shall classify a liability as current when:
a. The entity expects to settle the liability within its 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.

Noncurrent Liabilities
Noncurrent liabilities are defined residually. According to PAS 1, paragraph 69, all
liabilities not classified as current liabilities are classified as noncurrent liabilities.
Examples include:
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

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Estimated Liabilities
Estimated liabilities are obligations that exist at the end of the reporting period,
although their amount is not definite. They may be classified as either current or
noncurrent. Technically, an estimated liability may be considered a ”provision” if
it is both probable and measurable.

Covenants
If certain conditions relating to the borrower’s financial situation are breached,
the liability may become payable on demand. According to PAS 1, paragraph 74,
such a liability is classified as current, even if the lender agrees, after the end of
the reporting period and before the financial statements are authorized for issue,
not to demand payment as a consequence of the breach.

Nonadjusting Events
According to PAS 1, paragraph 76, the following events occurring between the
end of the reporting period and the date the financial statements are authorized
for issue qualify as nonadjusting events, meaning the loans remain classified as
current liabilities:
a. Refinancing on a long-term basis
b. Rectification of a breach of a long-term loan agreement
c. Receipt from the lender of a grace period ending at least twelve months after
the end of the reporting period

Contingent Liabilities
According to PAS 37, paragraph 10, a contingent liability is defined in two ways:
1. A possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or nonoccurrence of one or more un-
certain future events not wholly within the control of the entity.
2. A present obligation that arises from past events but is not recognized be-
cause it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, or the amount of the obli-
gation cannot be measured reliably.

Working Capital
Working capital is the excess of current assets over current liabilities. The working
capital ratio is calculated as current assets divided by current liabilities.

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Equity/Net Assets
Equity, simply stated, represents ”net assets,” or total assets minus total liabilities.
Equity is increased by profitable operations and contributions by owners, and de-
creased by unprofitable operations and distributions 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.

Forms of Statement of Financial Position

The format of the statement of financial position is not specified in PAS 1. In prac-
tice, two customary forms are used:
a. Report form: This form presents the three major sections (assets, liabilities,
and equity) in a downward sequence.
b. Account form: This form presents assets on the left side and liabilities and
equity on the right side of the statement, resembling the format of an ac-
count.