Statement of Financial Position 

- Formal statement showing the three elements comprising financial

positions,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
for additional financing.
Liquidity​ - ability of the entity to meet currently maturing obligations.
Solvency​ - availability of cash over the longer team to meet maturing obligations.

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.

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

Current Assets
PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:
a. The asset is cash or cash equivalent unless restricted to settle a liability for
more than 12 mos 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 12 mos 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

- Includes cash on hand, petty cash fund, cash in bank and any cash equivalent
- Shall be unrestricted in use
-
Cash equivalents
- PAS 7, paragraph 6, 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.
- Has a short maturity of three months or less from the date of acquisition
- What is important is the date of purchase which should be three months or
less before maturity.
- Equity securities cannot qualify as cash equivalent because shares do not
have a date of maturity.
 - Preference shares with specified redemption date and acquired three months
before redemption date can qualify as cash equivalents.

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.

Held for Trading

Appendix A of PFRS 9 provides that a financial asset is classified as held for trading
when:
a. 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.
- 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

- 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, otherwise
the nontrade receivables are classified as noncurrent assets.

Realized, sold or consumed

- Refers to trade receivables, inventories and prepayments
- 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
- Is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents.
- When normal operating cycle is not clearly identifiable, the duration is
assumed to be twelve months.
● 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.
● 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.
Presentation of Current Assets
- Current assets are usually listed in the SFP in the order of liquidity.
- PAS 1, paragraph 54, provides that as a minimum the line items under
currents 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
PAS 1, paragraph 66, simply states that “an entity shall classify all other assets not
classified as current as noncurrent assets.”

Noncurrent assets include the following:

a. Property, Plant and Equipment
b. Long-term investments
c. Intangible Assets
d. Other noncurrent assets

Property Plant and Equipment (Fixed Assets)

PAS 16, paragraph 6, defines PPE as:
a. Tangible assets
b. Held by an entity for use in production or supply of goods and services, for
rental to others, or for administrative purposes
- Assets that are held for sale, including land, or held for investment are
not included in PPE.
c. Expected to be used during more than one period.

Examples of PPE
a. Land g. Motor Vehicle
b. Land Improvement h. Furniture & fixtures
c. Building i. Office equipment
d. Machinery j. Patterns, molds and dies
e. Ship k. Tools
f. Aircraft l. 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 relationship.
 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.

Examples of long-term investments

a. Investments in shares and bonds
b. Investments in subsidiaries
c. Investments in associates
d. Investments in funds such as sinking fund, plant expansion fund, and preference
share redemption fund
e. Investment Property
f. Cash surrender value of life insurance policy
g. Investment in joint venture

Intangible Assets
PAS 38, paragraph 8, simply defines an intangible asset as an identifiable non
monetary asset without physical substance.
- Must be controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
PAS 38, paragraph 12, provides that an intangible asset is identifiable when:
a. It is separable or capable of being sold, transferred, licensed, rented or
exchanged separate from the entity.
b. It arises from contractual or other legal rights.

Examples of identifiable intangible assets

a. Patent
b. Franchise
c. Copyright
d. Trademark
e. Computer Software

Example of Unidentifiable Intangible Asset

a. Goodwill

Other Non Current Assets

- Those that do not fit into the definition of previously mentioned noncurrent
assets

Examples:
a. Long-term advances to officers, directors, shareholders and employees
b. Abandoned property
c. Long-term refundable deposit
Liabilities
Under the Revised Conceptual Framework, a liability is defined as
a. a present obligation of an entity
- The entity liable must be identified.
b. to transfer an economic resource
- obligation must be to pay cash, transfer non cash asset or provide
service at some future time
c. as a result of past events.
- Liability is not recognized until it is incurred

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 accrual for employees 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 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 ​due
for settlement within twelve months a ​ fter the end of reporting period.
- Ex: bank overdraft, dividends payable, income taxes, other non trade
payable and current portion of noncurrent financial liabilities.
​ re financial liabilities that are incurred with
c. Financial liabilities ​held for trading a
an intention to repurchase them in the near term.
- Ex: quoted debt instrument that the issuer may buy back in the near
term depending on changes in fair value.

Long-term debt currently maturing

PAS 1, paragraph 72, provides that a liability which is due to be settled within twelve
months after the end of reporting period is classified as ​current​, even if:
a. The original term was for a period longer than 12 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 FS are authorized
for issue.

However, if the refinancing in a long-term basis is completed on or before the end

of reporting period​, the refinancing is an adjusting event and therefore the
obligation is classified as ​noncurrent.
Discretion to refinance
PAS 1, paragraph79, provide that if the entity has the ​discretion ​to refinance or roll
over an obligation for at least 12 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 the obligation is classified as a current liability.

Covenants
- Are often attached to borrowing agreements which represent undertaking by
the borrower.
- Restrictions on the borrower as to undertaking further borrowings, paying
dividends, maintaining specified level of working capital and so forth.
- If certain conditions relating to the borrower’s financial situation are breached,
the liability becomes payable on demand​.
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.

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.
- 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 SFP shall include
the following line items for current liabilities:
a. Trade and other payables
- Includes account payable, notes payable, accrued interest on note
payable, dividends payable and accrued expenses
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability

Noncurrent Liabilities
PAS 1, paragraph 69, simply states that all liabilities not classified as current
liabilities are classified as noncurrent liabilities.
Examples of Non Current 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​.

Estimated liabilities
- are obligations which exist at the end of reporting period although the amount
is not definite.
- in many cases, the date when it is due or payable is not also definite and in
some instances, the exact payee cannot be identified or determined.
- Examples: estimated liability for premiums, estimated liability for warranties
and estimated liability under customer loyalty program.
- May be classified either as current or noncurrent.

Contingent Liability
PAS 37, paragraph 10, defines contingent liability in two ways.
- Is a ​possible obligation t​ hat arises from past events and whose existence will
be confirmed only by the occurrence or non occurrence of one or more
uncertain future events not wholly within the control of the entity.
A contingent liability is a ​present obligation t​ hat arises from past events but is ​not
recognized ​ because:
a. It is ​not probable ​that an outflow of resources embodying economic benefits
will be required to settle the obligation
b. The amount of the obligation ​cannot be measured reliably​.

Range of Outcome
a. Probable
- The future event is ​likely to occur. As a rule of thumb, probable means
more than 50% likely.
b. Possible
- The future event is ​less likely to occur. The occurrence is 50% or
less.
c. Remote
- The future event is least likely to occur or the chance of the future event
occurring is very slight. The occurrence is 10% or less.
Treatment of Contingent Liability
- is not recognized in the financial statements.
- shall be ​disclosed ​only.
The required disclosures are:
a. brief description of the nature of the contingent liability
b. an estimate of the financial effects
c. an indication of the uncertainties that exist
d. possibility of any reimbursement
If the contingent liability is ​remote​, no disclosure is necessary.
If the present obligation is probable and the amount can be measured reliably, the
obligation is not a contingent liability but shall be recognized as a ​provision​.

An expense and an estimated liability shall be recorded in recognizing a provision.

Thus a contingent liability is ​either ​probable or measurable ​but not both.

Contingent Asset
PAS 37, paragraph 10, defines contingent asset as a ​possible asset ​that arises
from past events and whose existence will be confirmed only by the occurrence or
non occurrence of one or more uncertain future events not wholly within the control
of the entity.

It usually arise from unplanned or other unexpected events that give rise to the
possibility of an inflow of economic benefits to the entity.

Example: a claim that an entity is pursuing through legal processes when the
outcome is uncertain.

Treatment of Contingent Asset

- Shall not be recognized because this may result in recognition of income that
may never be realized.
- However, when the realization of income is virtually certain, the related asset
is no longer contingent asset and its recognition is appropriate.
The outcome of contingent asset is reported as follows:
a. A contingent asset is recognized in the period when ​realized.​
b. Contingent assets are ​only disclosed when it is probable​.
c. If the contingent asset is ​possible​, no disclosure is required.
d. If the contingent asset us ​remote​, no disclosure is required.

Working Capital
The entity’s liquidity is of primary concern to most statement users and this can be
properly evaluated through 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
- Residual interest in the assets of the entity after deducting all of the liabilities.
- Net assets or total assets minus liabilities.
- Increased by profitable operations and contribution by owners
- Decreased by unprofitable operations and distribution to owners
Terms used in reporting the equity of an entity depending on the form of the entity
are:
a. Owner’s equity in a proprietorship
b. Partners’ equity in a partnership
c. Shareholders’ equity in a corporation

Shareholders’ Equity
- Is the residual interest of owers 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:

Philippine term IAS term

Capital stock Share capital
Subscribed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preference share capital
Additional paid in capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share

Share Capital and Share Premium

Share capital is the portion of the paid in capital representing the ​total par ​or ​stated
value ​of the shares issued.

Subscribed share capital ​is the portion of the authorized share capital that has been
subscribed but not yet fully paid and therefore still unsold.

Subscription receivable shall preferably be reflected as a ​deduction ​from the related

subscribed share capital.

However, subscriptions receivable collectible ​within ​one year shall be classified as

current asset​.

Share premium i​ s the capital contributed by the shareholders in excess of the par or
stated value of the shares subscribed and issued.
Retained Earnings
Retained earnings r​ epresent the cumulative balance of periodic net income or loss,
dividend distributions, prior period errors, changes in accounting policy and other
capital adjustments.

Unappropriated retained earnings r​ epresent that portion which is ​free and can be
declared as dividends ​to shareholders.

Appropriated retained earnings ​represent that portion which is restricted and

therefore not available for any dividend declaration​.

A ​deficit i​ s a debit balance in retained earnings. The deficit is not presented as an

asset but ​ as a deduction from shareholders' equity​.

Revaluation Surplus
Revaluation surplus ​is the excess of ​sound value over carrying amount of the
revalued asset​.

Sound value i​ s equal to the fair value or depreciated replacement cost.

Depreciated replacement cost i​ s equal to replacement cost minus accumulated

depreciation.

Carrying amount ​is computed by deducting accumulated depreciation on cost from

historical cost.

Treasury Shares
Treasury shares ​are entity’s ​own shares ​that have been issued and then reacquired
but not cancelled.

Treasury shares are usually recorded ​at cost ​and are not recognized as an asset.

The cost of treasury shares shall be reported as ​deduction from the shareholders’
equity​.

When treasury shares are acquired, the retained earnings ​must be appropriated t​ o
the extent of the cost of the treasury shares.
Reserves
The term ​“reserves” is not officially defined in any accounting standard or in the
Conceptual Framework.

Under international accounting standard, the use of equity reserves is based on

whether a reserve is part of ​distributable equity or non distributable equity​.

Distributable equity ​is that potion that ​can be distributed t​ o shareholders ​as
dividends ​without impairing the legal capital of the entity. This squarely pertains to
unappropriated retained earnings.

Non distributable equity ​is that portion that ​cannot be distributed ​to the
shareholders ​in any form ​during the lifetime of the entity.

Generally, ​non distributable equity reserves r​ epresent those items of equity ​other
than ​the aggregate par or stated value of share capital and retained earnings
unappropriated.

Examples of reserves
a. Share premium reserve or additional paid in capital
b. Appropriation reserve or retained earnings appropriated
c. Asset revaluation or revaluation surplus
d. Other comprehensive income reserve

Line items - Statement of Financial Position

PAS 1, paragraph 54, states that ​as a minimum,​ the SFP 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. Investment property
9. Biological assets
10. Total assets classified as held for sale and assets included in disposal group
classified as held for sale
11. Trade and other payables
12. Current tax asset and liability
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities (other than 11 and 14)
16. Liabilities included in disposal group held for sale
17. Noncontrolling interest
 18. Share capital and reserves

The listing 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 in 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 positiotion of an entity.​

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

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 SFP, namely:
a. Report Form
- this form sets forth the three major sections in a downward sequence
of assets, liabilities and equity.
b. Account Form
- as the title suggests, the presentation follows that of an account,
meaning, the assets are shown on the left side and the liabilities and
equity on the right side of the statement of financial position.
PAS 1, paragraph 57, provides that the standard does not prescribe the order or
format in which the line items are to be presented.