Statement of

Financial Position

Intermediate Accounting 3
Technical Knowledge
- To know the nature of a statement of financial
position
- To understand the current and noncurrent
classifications of assets and liabilities
- To understand refinancing of a currently maturing
debt
Technical Knowledge
- To identify the components of equity in a
corporation
- To identify the minimum line items in a statement of
financial position
- To be able to prepare a statement of financial
position using Philippine format and IFRS format
Statement of Financial Position
- A formal statement showing the three elements
comprising financial position namely assets, liability
and equity
- Investors, creditors and other statement users analyse
the statement of financial position to evaluate such
factors as liquidity, solvency and the need of the entity
for additional financing.
Statement of Financial Position
- Liquidity is the ability of the entity to meet currently
maturing obligations.
- Solvency is the availability of cash over the longer
term to meet maturing obligations.
- Information about liquidity and solvency is useful in
predicting the ability of the entity to comply with
future financial commitments and to pay dividends to
shareholders.
Assets
- The Revised Conceptual Framework defines an asset
as a present economic resource controlled by the entity
as a result of past events.
- An economic resource is a right that has the potential
to produce economic benefits.
- In layman’s language, assets are properties owned.
Assets
- The essential characteristics of an asset are:
a. The asset is controlled by the entity
b. The asset is the result of a past event
c. The asset has the potential to produce economic
benefits
Current Assets
- An entity shall classify an asset as current when:
(PAS 1)
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
Current Assets
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 in its normal operating cycle
Cash and Cash Equivalents
- This category includes cash on hand, petty cash fund,
cash in bank and any cash equivalent
- However, the cash and cash equivalent shall be
unrestricted in use, meaning available anytime for the
payment of current obligations
- Cash equivalents are 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.
Cash and Cash Equivalents
- For an investment to qualify as a cash equivalent, it
must be readily convertible into a known amount of
cash and be subject to an insignificant risk of changes
in value.
- Therefore, an investment normally qualifies as a cash
equivalent only when it has a short maturity of three
months or less from the date of acquisition.
Cash and Cash Equivalents
Examples of Cash Equivalents
a. 3-month BSP treasury bill
b. 3-year BSP treasury bill purchased three months
before date of maturity
c. 3-month time deposit
d. 3-month money market instrument
Cash and Cash Equivalents
- Note that what is important is the date of purchase
which should be three months or less before maturity.
- Thus, a BSP treasury bill that was purchased three
years ago cannot qualify as cash equivalent even if the
remaining maturity is three months or less.
- Equity securities cannot qualify as cash equivalent
because shares do not have a date of maturity.
- However, preference shares with specified
redemption date and acquired three months before
redemption date can qualify as cash equivalents.
Held for Trading
- A financial asset is classified as held for trading
when: (PFRS 9)
a. It is 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
Held for Trading
c. It is a derivative, except for a derivative that is a
financial guarantee contract or a designated and an
effective hedging instrument.

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 12 Months
- This category 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
- Nontrade receivables are classified as current assets
if collectible within one year from the end of reporting
period, the length of the operating cycle
notwithstanding
Realized, Sold or Consumed
- This current asset category refers to trade
receivables, inventories and prepayments
- These assets are 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
- The time between the acquisition of assets for
processing and their realization in cash or cash
equivalents
- When the normal operating cycle is not clearly
identifiable, the duration is assumed to be 12 months
- The 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
- The 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
- The normal operating cycle is significant as it is the
basis of determining the proper classification of assets
into either current or noncurrent
Presentation of Current Assets
- Current assets are usually listed in the statement of
financial position in the order of liquidity
- Minimum Line Item under Current Assets (PAS 1)
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
Non-Current Assets
- A residual definition
- An entity shall classify all other assets not classified
as current to noncurrent assets
Non-Current Assets
Non-Current Assets include the following:
a. Property, plant and equipment
b. Long-term investments
c. Intangible assets
d. Other noncurrent assets

Deferred tax asset is classified as noncurrent asset.

Property, Plant and Equipment
- 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
Property, Plant and Equipment
- Major characteristics of PPE
a. PPE are tangible assets, meaning with physical
substance
b. PPE are used in business, meaning used in
production or supply of goods and services, for rental
purposes and for administrative purposes
c. PPE are expected to be used over a period of more
than one year
Property, Plant and Equipment
- Assets that are held for sale, including land, or held
for investment are not included in property, plant and
equipment.
Examples of Property,
Plant and Equipment
a. Land g. Motor Vehicle
b. Land Improvement h. Furniture and Fixtures
c. Building i. Office Equipment
d. Machinery j. Patterns, Molds and Dies
e. Ship k. Tools
f. Aircraft l. Bearer Plants

The old term for property, plant and equipment is

fixed assets.
Long-term Investments
- 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
Long-term Investments
- 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 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
- Identifiable nonmonetary asset without physical
substance
- Must be controlled by the entity as a result of past
event and from which future economic benefits are
expected to flow to the entity
- Do not have physical substance but are expected to
provide future economic benefits to the entity
Intangible Assets
- Intangible asset is identifiable:
a. When it is separable or capable of being sold,
transferred, licensed, rented or exchanged separate
from the entity
b. When it arises from contractual or other legal right
- Examples of identifiable intangible assets: patent,
franchise, copyright, trademark and computer software
- Example of unidentifiable intangible asset is
goodwill
Other Noncurrent Assets
- Assets that do not fit into the definition of the
previously mentioned noncurrent assets
- Examples: long-term advances to officers, directors,
shareholders and employees, or abandoned property
and long-term refundable deposit
Liabilities
- A liability is a present obligation of the entity to
transfer an economic resource as a result of past
events.

Essential characteristics of a liability are:

1. The entity has an obligation
- The entity liable must be identified
- It is not necessary that the payee or the entity to
whom the obligation is owed be identified.
Liabilities
2. The obligation is to transfer an economic resource
- The very heart of the definition of a liability
- The obligation must be to pay cash, transfer noncash
asset or provide service at some future time

3. The liability arises from past event

- The liability is not recognized until it is incurred
Current Liabilities (PAS 1)
- An entity shall classify a liability as current when:
a. The entity expects to settle the liability in 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
Examples of Current Liabilities
a. Trade payables and accruals for employee 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

liabilities even if they are settled more than 12 months
after the end of reporting period.
Examples of Current Liabilities
b. Obligations that are not settled as part of the normal
operating cycle but are due for settlement within 12
months after the end of reporting period.

Examples of such current obligations are bank

overdraft, dividends payable, income taxes, other
nontrade payable and current portion of noncurrent
financial liabilities.
Examples of Current Liabilities
c. Financial liabilities held for trading are financial
liabilities that are incurred with an intention to
repurchase them in the near term.

An example of a financial liability held for trading is a

quoted debt instrument that the issuer may buy back in
the near term depending on changes in fair value.
Long-term Debt Currently Maturing
- A liability which is due to be settled within 12
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 financial statements
are authorized for issue
Long-term Debt Currently Maturing
- 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 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
- Attached to borrowing agreements which represent
undertakings by the borrower
- Restrictions on the borrower as to undertaking
further borrowing, 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
Covenants
- 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
- The liability is classified as noncurrent if the lender
has agreed on or before the end of reporting period to
provide a grace period at least 12 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
- Minimum Line Item (the face of the statement of
financial position shall include) under 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
Presentation of Current Liabilities
- 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.
Non-Current Liabilities
- A residual definition
- An entity shall classify all other liabilities not
classified as current to noncurrent liabilities
Examples of Non-Current Liabilities
a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to company officers
e. Long-term deferred revenue
Working Capital
- The excess of current assets over current liabilities
- Working capital ratio is current assets divided by
current liabilities
Estimated Liabilities
- Obligations which exist at the end of reporting
period although the amount is not definite
- 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,
warranties and customer loyalty program
- May be classified either as current or noncurrent
Contingent Liability
- Possible obligation that arises from past event 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
Contingent Liability
- A contingent liability is a present obligation that
arises from past event 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
The range of outcome of uncertainty relating to future
event may be described as:
a. Probable
- The future event is likely to occur
- Probable means more than 50% likely
Range of Outcome
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
- A contingent liability is not recognized in the
financial statements. A contingent liability 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
Treatment of Contingent Liability
- 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.
- A contingent liability is either probable or
measurable but not both.
Contingent Asset
- Possible asset that arises from past event 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
- Usually arise from unplanned or other unexpected
events that give rise to the possibility of an inflow of
economic benefits to the entity
- Example is a claim that an entity is pursuing through
legal processes when the outcome is uncertain
Treatment of Contingent Asset
- A contingent asset shall not be recognized because
this may result to recognition of income that may
never be realized.
- When the realization of income is virtually certain,
the related asset is no longer contingent asset and its
recognition is appropriate.
Treatment of Contingent Asset
- The outcome of a contingent asset is reported as
follows:
a. A contingent asset is recognized in the period when
realized
b. A contingent asset is only disclosed when it is
probable
c. If the contingent asset is possible, no disclosure is
required
d. If the contingent asset is remote, no disclosure is
required
Equity
- The residual interest in the assets of the entity after
deducting all of its liabilities
- Net assets or assets minus liabilities
- Increased by profitable operations and contribution
by owners
- Decreased by unprofitable operations and
distribution to owners
Equity
- The 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. Partner’s equity or capital in a partnership
c. Stockholders’ equity or shareholders’ equity in a
corporation

The term equity may simply be used for all business

entities.
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 unissued.
Share Capital and Share Premium
- Subscriptions receivable shall preferably be reflected
as a deduction from the related subscribed share
capital.

- Subscriptions receivable collectible within one year

shall be classified as current asset.

- Share premium is the capital contributed by the

shareholders in excess of the par or stated value of the
shares subscribed and issued.
Retained Earnings
- Retained earnings represent 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 represent that

portion which is free and can be declared as dividends
to the shareholders.
Retained Earnings
- Appropriated retained earnings represent that portion
which is restricted and therefore not available for any
dividend declaration.

- A deficit is a debit balance in retained earnings. The

deficit is not presented as an asset but as deduction
from shareholders’ equity.
Revaluation Surplus
- Revaluation surplus is the excess of sound value over
carrying amount of the revalued asset
- Sound value is equal to the fair value or depreciated
replacement cost
- Depreciated replacement cost is 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 an entity’s own shares that have
been issued and then reacquired but not canceled
- Treasury shares are usually recorded at cost and are
not recognized as an asset
- The cost of treasury shares shall be reported as a
deduction from the shareholders’ equity
- When treasury shares are acquired, the retained
earnings must be appropriated to 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 nondistributable equity.
- Distributable equity is that portion that can be
distributed to shareholders as dividends without
impairing the legal capital of the entity.
Reserves
- Distributable equity squarely pertains to
unappropriated retained earnings.
- Nondistributable equity is that portion that cannot be
distributed to the shareholders in any form during the
lifetime of the entity.
- Generally, nondistributable equity reserves represent
those items of equity other than the aggregate par or
stated value of share capital and retained earnings
unappropriated.
Reserves
Examples of Reserves
a. Share premium reserve or additional paid in capital
b. Appropriation reserve or technically known as
retained earnings appropriated
c. Asset revaluation reserve or revaluation surplus
d. Other comprehensive income reserve
Minimum Line Items in the SFP
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
Minimum Line Items in the SFP
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
Minimum Line Items in the SFP
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. Non-controlling interest
18. Share capital and reserves
The listing of the line items
is not exclusive
- PAS 1 simply provides a list of items that are
sufficiently different in nature and function to warrant
separate presentation on the face of the statement of
financial position.
- 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 position of an entity.
The listing of the line items
is not exclusive
- 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
1. Report Form
- Sets in a downward sequence the assets, liabilities
and equity

2. Account Form
- Assets are shown at the left side while liabilities and
equity at the right side
Forms of Statement of
Financial Position
- The statement of financial position is an expansion
of the accounting equation “asset equals liability plus
equity”.

- The standard does not prescribe the order or format

in which line items are to be presented.
Forms of Statement of
Financial Position
- Under Philippine jurisdiction, the common practice
is to present in the statement of financial position
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 in accordance with IAS 1.
Forms of Statement of
Financial Position
In United Kingdom, the following order is used:
Noncurrent Assets
Current Assets
Equity
Noncurrent Liabilities
Current Liabilities