CHAPTER 8 PRESENTATION OF FINANCIAL STATEMENTS Statement of financial position PAS. 1 TECHNICAL KNOWLEDGE To identify the components of financial statements. To understand the objective of financial statements. To know the preparation of a statement of financial position. To identify the minimum line items to be presented in a statement of financial position as required by IFRS. To understand the current and noncurrent classification of assets and liabilities. To know the forms of presenting the statement of financial position. 145FINANCIAL STATEMENTS Financial statements are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users. ‘The financial statements are the end produc i of the financial accounting process. ig a kee Financial statements are a structured financial representation of the financial position and financial performance of an entity. General purpose financial statements An entity shall prepare and present i a general purpose financial statements in accordance with the Internati Reporting Standards. ada ee General purpose financial statements or simply referred to as financial statements are those intended to meet the needs of users who are not in a position to require an entity to Prepare reports tailored to their particular information In other words, general p n , wurpose financial statements are directed to all common users and not to specific users. Components of financial statements A complete set of financial statem i a ents following components: oun Statement of financial position Income statement Statement of comprehensive income Statement of changes in equity Semen of cash flows - jotes, comprising a summary of significant i o sin accountin, accounting policies and other explanatory notes . i oak eye 146 Objective of financial statements The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range: of users in making economic decisions. Financial statements also show the results of the management's stewardship of the resouroes entrusted to it. ‘To meet this objective, financial statements provide information about the following: Assets Liabilities Equity Income and expenses, including gains and losses Contributions by and distributions to owners in their capacity as owners £ Cash flows paese Frequency of reporting Financial statements shall be presented at least annually. When‘an entity's end of reporting period changes and financial statements are presented for a period longer or shorter than one year, an entity shall disclose: ‘a. The period covered by the financial statements. b. The reason for using a longer or shorter period. The fact that amounts presented in the financial statements are not entirely comparable. . Statement of financial position ‘Astatement 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 the statement of financial position to evaluate such factors as liquidity, solvency and the need of the entity for additional financing. 147Definition of asset An asset is an economic resource coritrolled i of ae by an entity as a An economic regource is a right that has the potential peta right potential to produce Classification of assets Assets are classified only into two, namely current assets and noncurrent assets. When an entity supplies goods or services within a clearly identifiable operating cycle, the separate classification of current and noncurrent assets is a useful information by distinguishing between net assets that are continuously circulating as working capital from the net assets used in long-term operations. 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 entity's normal operating cycle is not clearl; identifiable, the duration is assumed to be twelve Teach. Current assets PAS 1, paragraph 66, provides that an entity shall classify asset as current when: at ei a. The asset is cash or 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. 148 Presentation of current assets Current assets are usually listed 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 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”. 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: Property, plant and equipment Long-term investments Intangible assets Deferred tax assets Other noncurrent assets oaorp 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”. Examples of property, plant and equipment include land, building, machinery, equipment, furniture, fixtures, patterns, molds, dies and tools. Most property, plant and equipment; except land, are presented at cost less accumulated depreciation. 149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”. 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. Definition of liability A liability is a present obligation of an entity to transfer an economic resource as a result of past event. An obligation is a duty or responsibility that an entity has no practical ability to avoid. An obligation can either be legal or constructive. A liability is classifigd as current and noncurrent, 150 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. 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 ‘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 payable are separately presented. Noncurrent liabilities ‘The term “noncurrent liabilities” is also a residual definition. PAS 1, paragraph 69, provides that all liabilities not classified as current are classified as noncurrent. Noncurrent portion of long-term debt Finance lease liability Deferred tax liability Long-term obligations to company officers Long-term deferred revenue eepeee 151Currently maturing long-term debt A liability which is due to be settled within twelve months after the reporting period is classified as current, even if: 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 reporting period and before the financial statements are authorized for issue. However, if the refinancing on a long-term basis is completed on or before the end of the reporting period, the refinancing is an adjusting event and therefore the obligation is classified as noncurrent. Discretion to refinance 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. The reason for this treatment is that such obligation is considered to form part of the entity's long-term refinancing because the entity has an unconditional right under the existing loan agreement to defer payment for at least twelve months after the end of the reporting 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. 152 Covenants Covenants are often attached to borrowing agreements which represent undertakings by the borrower. 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. Effect of breach of covenants PAS 1, paragraph 74, provides that the liability is classified as current even if the lender has agreed, after the reporting ‘period and before the statements are authorized for issue, not to demand payment as a consequence of the breach. ‘This liability is classified as current because at reporting date the borrower does not have an unconditional right to defer payment for at least twelve months after the reporting period. _ However, Paragraph 75 provides 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. 158Definition of equity The term equity is the residual interest in the assets of the entity after deducting all of its liabilities. Simply stated, equity means “net assets” or total assets minus liabilities, ‘The terms used in reporting the equity of an entity depending on the form of the business organization are: a, Owner's equity in a proprietorship b. Partners’ equity in a partnership ©. Stockholders’ equity or shareholders’ equity in a corporation However, the term equity may simply be used for all business entities. Under PAS 1, paragraph 7, the holders of instruments classified as equity are simply known as owners. Shareholders’ equity Shareholders’ 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 LAS term are: Philippine term TAS term Capital stock Share capital Subscribed capital stock Subscribed share capital Preferred stock Preference share capital Common stock Ordinary share capital Additional paid capital Share premium Retained earnings (deficit) Accumulated profits (losses) Retained earnings appropriated Appropriation reserve Revaluation surplus Revaluation reserve ‘Treasury stock ‘Treasury share Ra Notes to financial statements Notes to financial statements provide narrative description or disaggregation of items presented in the financial statements and information about items that do not qualify for recognition. Notes contain information in addition to that presented in the statement of financial position, income statements statement of comprehensive income, statement of changes in equity and statement of cash flows. In other words, notes to financial statements are used to report information that does not fit into the body of the financial statements in order to enhance the understandability of the financial statements. ‘The purpose of the notes to financial statements is "to provide the necessary disclosures required by Philippine Financial Reporting Standards.” Forms of statement of financial position 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 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. ‘The following is an illustration of the two forms of statement + of financial position. 155Report form SAMPLAR COMPANY Statement of Financial Position ‘December 81, 2020 ASSETS Note Current assets: Cash and cash equivalents (500,000 Financial assets at fair value 200,000 ‘Trade and other receivables 700,000 Inventories 8) 900,000 Prepaid expenses @) __50,000 Total'current assets 2,350,000 Noncurrent assets: Property. plant andequipment (5) 5,000,000 Investment in associate, at equity 1,000,000 Long-term investments (@) 5,100,000 Intangible assets (1) 2,000,000 Other noncurrent aseets (8) "100,000 ‘Total noncurrent assets Total assets 15,550,000 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: ‘Trade and other payables 750,000 Note payable - short-term debt 400,000 Current portion of bonds payable 200,000 Warranty liability 50,000 Total current liabilities 1,400,000 Noncurrent liabilities: Bonds payable - remaining portion 1,800,000 Note payable - due July 1, 2022 600,000 Deferred tax liability 100,000 ‘Total noncurrent liabilities 2,500,000 Shareholders’ equity Share capital, P100 par 5,000,000 Reserves (10) 3,000,000 Retained earnings 3,650,000 ‘Total shareholders’ equity 11,650,000 Total liabilities and shareholders’ equity 15,550,000 156 Note 1 - Cash and cash equivalents Cash on hand 40,000 Cash in bank 300,000 Petty cash fund 10,000 BSP Treasury bill, purchased on December 1, 2020 a and due March 1, 2021 150,000 ‘Total cash and cash equivalents 500,000 Note 2- Trade and other receivables Accounts receivable 580,000 Allowance for doubtful accounts (20,000) Notes receivable 100,000 Accrued interest on notes receivable 10,000 ‘Advances to employees, collectible currently 30,000 ‘Total trade and other receivables 700,000 Note 3 - Inventories Finished goods 300,000 Goods in process 400,000 Raw materials . 150,000 Manufacturing supplies 50,000 Total invéntories 900,000 Note 4 - Prepaid expenses Office supplies unused 30,000 Prepaid insurance 20,000 Total prepaid expenses 50,000 Note 5 - Property, plant and equipment 1,500,000 Balding 4,500,000 Machinery and equipment 1,000,000 Furniture and fixture 300,000 Patterns, molds, dies and tools, net 100,000 Total 7,400,000 Accumulated depreciation (2,400,000) Carrying amount 5,000,000 157Accumulated depreciation: Building Machinery and equipment Furniture and fixtures ‘Total accumulated depreciation Note 6 — Long-term investments Plant expansion fund Investment in bonds Cash surrender value Total other long-term investments Note 7 - Intangible assets Patent Franchise Total intangible assets Note 8 - Other noncurrent assets Long-term refundable deposit Long-term advances to officers Total other noncurrent assets Note 9~ Trade and other payables Accounts payable Notes payable Accrued interest on note payable Income tax payable Dividends payable Accrued expenses Total trade and other payables Note 10 - Reserves Share premium Retained earnings appropriated for contingencies Total reserves 158 1,900,000 350,000 2,400,000 2,000,000 3,000,000 100,000 5,100,000 500,000 1,500,000 2,000,000 20,000 80,000 100,000 350,000 150,000 15,000 50,000 100,000 85,000 750,000 2,000,000 000,000 3,000,000 Account form SAMPLAR COMPANY Statement of Financial Position December 31, 2020 ASSETS Current assets: Cash and cash equivalents 500,000 Financial assets at fair value 200,000 ‘Trade and other receivables 700,000 Inventories 900,000 Prepaid expenses 50,000 Total current assets 2,850,000 Noncurrent assets: Property, plant and equipment 5,000,000 Investment in associates 1,000,000 Long-term investments 5,100,000 Intangible assets 2,000,000 Other noncurrent assets __100,000 ‘Total noncurrent assets 13,200,000 ‘Total assets 159 LIABILITIES AND EQUITY (Current liabilities: ‘Trade and other payables. 750,000 Note payable - short-term debt 400,000 ‘Current portion of bonds payable 200,000 Warranty liability __50,000 ‘Total current liabilities 1,400,000, Noncurrent liabilities: Bonds payable-remaining portion 1,800,000 Note payable-due July 1, 2022 600,000 Deferred tax liability _ 100,000 ‘Total noncurrent liabilities 2,500,000 Equity: Share capital, P100 par 5,000,000 Reserves 3,000,000 Retained earnings _8,650,000 ‘Total equity 11,650,000 15,550,000 Total lsbilities and equity 15,550,000Line items in statement of findnetal position PAS 1, paragraph 54, states that as a minimum, the face of 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 accounted for by the equity method 7. Intangible assets 8. Investment property 9: Biological assets 10. Total of 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 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 classified as held for sale 17. Noncontrolling interest 18. Share capital and reserves In the Philippines, the common practice is to present current assets before noncurrent assets, current liabilities before noncurrent liabilities, and equity after liabilities. Other formats may be equally appropriate provided the distinction is clear. This is in accordance with paragraph 7 of the Preface to PAS 1. PAS 1, paragraph 57, provides that the standard does not prescribe the order or format in which items are to be ‘presented in the statement of financial position. Note that the format of the statement of financial Position as illustrated in the appendix to IAS 1 presents noncurrent assets before current assets, equity before liabilities, and noncurrent liabilities before current liabilities. This may be the practice in other jurisdiction, like the United Kingdom. 160