Republic of the Philippines

CAMARINES NORTE STATE COLLEGE

F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

College of Business and Public Administration

Topic: General Purpose Financial Statements

Class Schedule: AE 112 – Intermediate Accounting 3/BSA 2A and 2B/ MW 9:30-11:00am/TTh 2:00-
3:30pm

Learning Objectives:

a. Construct/Prepare a statement of financial position in as detailed as possible.

Presentation of Statement of Financial Position

A statement of financial position may be presented in a classified or an unclassified manner.

a. A classified presentation shows distinctions between current and noncurrent assets and current
and noncurrent liabilities.
b. An unclassified presentation (also called ‘based on liquidity’) shows no distinction between
current and noncurrent items.

Example: (assets)

Classified

ASSETS
Current assets
Cash and cash equivalents XXXX
Trade and other receivables XXX
Inventories XXXX
Other current assets XXXX
Total current assets XXXX
Non-current assets
Investment in equity instruments XXXX
Property, plant and equipment XXXX
Other intangible assets XXXX
Goodwill XXXX
Total non-current assets XXXX
TOTAL ASSETS XXXX
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

College of Business and Public Administration

Unclassified

ASSETS
Cash and cash equivalents XXXX
Trade and other receivables XXX
Inventories XXXX
Other current assets XXXX
Investment in equity instruments XXXX
Property, plant and equipment XXXX
Other intangible assets XXXX
Goodwill XXXX
TOTAL ASSETS XXXX

A classified presentation shall be used except when an unclassified presentation provides

information that is reliable and more relevant. When that exception applies, assets and liabilities are
presented in order of liquidity (this is normally the case for banks and other financial institutions).

Whichever method is used, PAS 1 requires the disclosure of items that are expected to be
recovered or settled (a) within 12 months and (b) beyond 12 months, after the reporting period.

A classified presentation highlights an entity’s working capital and facilitates the computation of
liquidity and solvency ratios.

Current assets and Current liabilities

Current assets Current liabilities

-are assets that are:
a. Expected to be realized, sold or
consumed in the entity’s normal
operating cycle
b. Held primarily for trading
c. Expected to be realized within 12 months
after the reporting period
d. Cash or cash equivalent, unless restricted
from being exchanged or used to settle
liability for at least 12 months after the
reporting period
-are liabilities that are
a. Expected to be settled in the entity’s
normal operating cycle
b. Held primarily for trading
c. Due to be settled within 12 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

All other assets and liabilities are classified as noncurrent.

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 clearly
identifiable, it is assumed to be 12 months (PAS 1.68)
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

College of Business and Public Administration

Assets and liabilities that are realized or settled as part of the entity’s normal operating cycle
(e.g., trade receivables and payables, inventories, accruals) are presented as current, even if they are
expected to be realized or settled beyond 12 months after the reporting period.

Assets and liabilities that do not form part of the entity’s normal operating cycle (e.g., non-
operating assets and liabilities) are presented as current only when they are expected to be realized or
settled within 12 months after the reporting period.

Deferred tax assets and liabilities are always presented as noncurrent items in a classified
statement of financial position, regardless of their expected dates of reversal.

Examples:

Current Assets Current liabilities

• Cash and cash equivalents • Accounts payable
• Accounts receivable • Salaries payable
• Non-trade receivable collectible within 12 • Dividends payable
months • Income (current) tax payable
• Held for trading securities • Unearned income
• Inventory • Portion of notes/loans/bonds payable
• Prepaid assets due within 12 months

Noncurrent assets Noncurrent liabilities

• Property, plant, and equipment • Portion of notes/loans/bonds payable
• Non-trade receivable collectible beyond due beyond 12 months
12 months • Deferred tax liability
• Investment in associate
• Investment property
• Intangible assets
• Deferred tax asset

Refinancing agreement

A long-term obligation that is maturing within 12 months after the reporting period is classified as
current, even if a refinancing agreement to reschedule payments on a long-term basis is completed after
the reporting period but before the financial statements are authorized for issue.

However, the obligation is classified as noncurrent if the entity expects, and has the discretion, to
refinance it on a long-term basis under an existing loan facility.

If the refinancing is not at the discretion of the entity, the financial liability is current.

Refinancing refers to the replacement of an existing debt with a new one but with different terms, e.g.,
an extended maturity date, or a revised payment schedule.

Loan facility refers to a credit line.

 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

College of Business and Public Administration

Illustration:

BB Co.’s reporting date is December 31, 2020. A bank loan taken 10 years ago is maturing on June 30,
2021.

A currently maturing obligation is classified as current even if that obligation used to be noncurrent.
Therefore, the loan is presented as a current liability in BB Co.’s December 31, 2020 statement of
financial position.

On January 15, 2021, BB Co. enters into a refinancing agreement to extend the maturity date of the
loan to June 30, 2025. BB Co.’s financial statements are authorized for issue on March 31, 2021.

Continuing with the general rule, a currently maturing obligation is classified as current even if a
refinancing agreement, on a long-term basis, is completed after the reporting period and before the
financial statements are authorized for issue. Accordingly, the loan is nevertheless presented as a
current liability.

Under the original terms of the loan agreement, BB Co. has the unilateral right to defer the payment
of the loan up to a maximum period of 4 years from the original maturity date. BB Co. expects to
exercise this right after the reporting date but before the financial statements are authorized for
issue.

BB Co. has the discretion to refinance the obligation on a long-term basis under an existing loan facility
(i.e., the unilateral right is included in the original terms of the loan agreement). Accordingly, the loan is
classified as noncurrent.

Liabilities payable on demand

Liabilities that are payable upon demand of the lender are classified as current.

A long-term obligation may become payable on demand as a result of a breach of a loan provision. Such
an obligation is classified as current even if the lender agreed, after the reporting period but before the
financial statements are authorized to be issued, not to demand payment. This is because the entity
does not have an unconditional right to defer settlement of the liability for at least 12 months after the
reporting period.

However, the liability is noncurrent if the lender provides the entity by the end of the reporting period
(e.g., on or before December 31) a grace period ending at least 12 months after the reporting period,
within which the entity can rectify the breach and during which the lender cannot demand immediate
repayment.

Illustration:

In 2021, BB Co. took a long-term loan from a bank. The loan agreement requires BB Co. to maintain a
current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on demand. On
December 31, 2021, BB Co.’s current ratio is 1.8:1, below the agreed level. BB Co.’s financial statements
are authorized for issue on March 31, 2022.
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

College of Business and Public Administration

Case 1. On January 5, 2022, the bank gives BB Co. a chance to rectify the breach of loan
agreement within the next 12 months and promises not to demand immediate repayment
within this period.

The loan is classified as current liability because the grace period is received after the reporting date.

Case 2. On December 31, 2021, the bank gives BB Co. a chance to rectify the breach of loan
agreement within the next 12 months and promises not to demand immediate repayment within this
period.

The loan is classified as noncurrent liability because the grace period is received by the reporting date.

Estimated liabilities

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.
Common examples of estimated liabilities include estimated liability for premiums, estimated liability for
warranties and estimated liability for customer loyalty program.

Estimated liabilities may be classified either as current or noncurrent.

Contingent liability

PAS 37, paragraph 10, defines a contingent 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 events not wholly
within the control of the entity.

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. 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.
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

College of Business and Public Administration

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.

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 event and whose
existence will be confirmed only by the occurrence or 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 an inflow of economic benefits to the entity.
An 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 my
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 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 or remote, no disclosure is required.

Equity

The term equity is the residual interest in the assets of the entity after deducting all of the liabilities. It is
the net assets or total assets minus total liabilities.

Equity is increased by profitable operations and contribution by owners. Conversely, it is decreased by

unprofitable operations and distributions to owners.
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

College of Business and Public Administration

The terms used in reporting the equity of an entity depends on the form of an entity:

a. Owner’s equity in a proprietorship

b. Partners’ equity in a partnership
c. Shareholders’ equity in a corporation

However, the term equity may simply be used for all business entities.

In a corporation, the following elements constituting shareholders’ equity includes (but not limited to):

a. Share capital / Capital stock

b. Subscribed share capital / Subscribed capital stock
c. Ordinary share capital / Common stock
d. Preference share capital / Preferred stock
e. Share premium / Additional paid in capital
f. Accumulated profits (losses) / Retained earnings (Deficit)
g. Appropriation reserve / Retained earnings appropriated
h. Revaluation reserve / Revaluation surplus
i. Treasury share/ Treasury stock

Forms of statement of financial position

a. Report form
b. Account form

References:

PAS 1 – Presentation of Financial Statements

Valix, C., Valix, C.A. & Peralta, J. 2020. Intermediate Accounting 3
Millan, Z.V. 2020. Intermediate Accounting 3