pps S 7G CHAPTER Statement of Financial Position LEARNING OBJECTIVES At the end of the chapter, the student should be able to: 1. identity the elements in the statement of financial position; Nn describe the criteria for recognition of assets and liabilities; 3. identify the minimum items that are presented in the statement of financial position; 4. discuss the classification of assets; 5. give the composition of current assets and non-current assets; 6. identify the classification of liabilities; 7. explain equity and its composition; " 8. discuss the events after the statement of financial position date; 9. specify the authorization date for the issuance of the statement of financial position; and 10. describe the disclosure requirements of events after the date of the statement of financial position.Statement of Financial Position, CONCEPT AND NATURE A sfalennent Of TAnC tal POsHon | tructured financial statement that shows the assets, labilities, and equity of business. / ofa diven date ontily ¢ The assets, Habilities, and equity are the three accounting, elements found in the statement of financial position The information presented on the face of the statement of Hinaneial position ts trae and correct only as of the date indicated on the face of the statement “he are resources controlled by the entity asa result of past events and fron which future economic benefits are expected to flow to the entity Laabiliti events, the settlementot which are expected to result in. an outflow from the entity of resource we presen tobligations of the entity arising, from past embodying economic benefits, Paty is the residual interest in the assets of the entity after deducting, all its liabilities: The statement of financial position reflects the claims of the creditors and the owners on the assets of the busine ‘The claim of the creditors is technically called liabilities, while the claim of the owner ts ¢ red to as equity. This relationship is clearly depicted inthe basic accounting, equation: asset is equal to lial capital ities plus RECOGNITION OF ASSETS AND LIABILITIES Recognition is the proc of incorporating, in the statement of financial Position an item that mee and satisfies the crit the definition of an element a for recognition set out in the Framework, The process of recognition starts in the identification of transactions and events that are financial in character and have olfec ‘s on the accounting elements, Once the events are identified, th accounts, properly ey are recorded chronologically in the books of3) Accounting and Reporting Recognition involves the depiction of the item in words and bv a monetary amount and the inclusion of that amount the statement of financial statement totals. Items that Satisfy cognition criteria should be recognized in the statement of Mancial position @ The failure to recognize assets and liabilities in the statement of financial position is not rectified by disclosure of the accounting Policies used nor by notes or explanatory material. CRITERIA FOR RECOGNITION Assets or liabilities should be recognized if: a. itis probable that any future economic benefit associated with the item will flow to or from the entity; and b. the item has a cost or value that can be measured with reliability Asset is not recognized in the statement of financial position when expenditure has been incurred for which it is considered improbable that economic benefits will flow to the entity beyond the current accounting period. Instead, such a transaction results in the recognition of an expense in the statement of comprehensive income. The foregoing treatment does not imply either that the intention of management in incurring expenditure was other than to generate future economic benefits for the entity or that management was misguided. The only implication is that the degree of certainty that economic benefits will flow to the entity beyond the current accounting period is insufficient to warrant the recognition of an asset. Obligations under contracts that are equally proportionately unperformed are generally not recognized as liabilities in the statement of financial position. For example, liabilities for inventory order that have not yet received. However, such obligations that meet the definition of liabilities and, provided the recognition criteria are met in the particular circumstances, may qualify for recognition. In such circumstances, recognition of liabilities entails recognition of related assets or expenses.Statement of Financial Position @ INFORMATION TO BE PRESENTED ON THE FACE OF THE STATEMENT OF FINANCIAL POSITION Asa minimum, the face of the statement of financial position shall include line items that present the following: a. Property, plant, and equipment b. Investment property c. Intangible assets d. Financial assets (excluding item e, h, and i) Investment accounted for using the equity method 2 f. Biological assets g. Inventories h. Trade and other receivables i. Cash and cash equivalents . Trade and other payables k. Provisions» . Financial liabilities (excluding items j and k) m. Liabilities and assets for current tax n. Deferred tax liabilities and deferred tax assets 0. Minority interest p. Issued capital and reserves attributable to equity holders of the parent. The statement of financial position shall also include line items that present the following amounts: a. The total assets classified as held for sale and assets included in disposal groups properly classified as held for sale b. Liabilities included in disposal groups properly classified as held for sale Additional line items, headings, and subtotals shall be Presented on the face of the statement of financial positionfia) Agcounting and Reporting when such presentation is relevant to understanding the entity's qnanetal position, PAS Lonly states the minimum line items to be presented on the face of the statement of financial position. The judgment on whether additional line items are presented separately is based on AN AS: sment ot a. The nature and liquidity of assets; b. The tunetion of assets within the entity; and ce. The amounts, nature, and timing of liabilities, ASSETS PAS 1 broadly classifies assets into: 1, current) and 2. non-current assets. An entity shall present current and non-current assets as separate classitications on the face of its balance sheet. However, PAS 1 does not prescribe the order of format in which items are to be presented on the face of the statement of financial position. It only provides a list of items that are sutticiently different in nature or function to warrant separate presentation The common practice, however, is to present current assets before non-current assets on the face of the statement of financial position. Current Assets An asset shall be classified as current when it satisfies any of the following criteria: 1. It is expected to be realized in, or is intended for sale oF consumed in the entity's normal operating cycle; 2. Itis held primarily for the purpose of being traded; 3. It is expected to be realized within twelve months after the date of the statement of financial position; orStaternent of Financial Position @ 4 1his cash or canh equivalent unless it is restricted from liability for at least being, exchanged or used to settle twelve months after the date of the statement of financial position Phe operating, cycle of an entity is the time between the aequinition Of assets for processing and their realization in cash or canh equivalents, When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed to be twelve months. ion are Current assets in the statement of financial posi Classified in the order of liquidity, Non-current Assets that do not meet any of the criteria required for current sified as non-current assets, All other assets not it assets shall be classified as non-current. Asset clas ssified as cur When an entity presents current and non-current assets as separate classifications on the face of its statement of financial position, it shall not classify deferred tax '$ as Current assets. PAS | uses the term “non-current” to include tangible, intangible and financial assets of a long-term nature. It does not prohibit the use of alternative descriptions as long as the meaning COMPOSITION OF CURRENT AND NON-CURRENT ASSETS Following, the requirement of the principle of aggregation, the line items in the current assets section of the statement of financial Position are: a. cash and cash equivalents, b. financial assets, c. trade and other receivables, d. inventories, and ©. prepaid expenses. pe© Financial Accounting and Reporting Likewise, the non-current assets section of the statement of financial position shall include the following items: 1. property, plant, and equipment, 2. long-term investments, 3. intangibles, and 4. other non-current assets. COMPOSITION OF CURRENT ASSETS Cash and Cash Equivalents Cash comprises cash on hand and demand deposit. Basically, the following are included and classified as cash: 1. Money. This includes undeposited cash collections in the form of bills and coins. Money may be on hand (cash on hand) or in bank (cash in bank). Bills and coins are included as part of cash and cash equivalent account if they are considered a legal tender and in circulation. 2. Money substitutes. These are cash items in the form of customer's checks, bank drafts, money orders, manager's checks, cashier’s checks, or traveler’s checks. Money substitutes are included as part of cash and cash equivalent account if they are acceptable for immediate credit. 3. Current working funds. These are funds set aside to meet current needs like petty cash fund, interest fund, dividend fund, and payroll fund. Working funds are included as part of cash and cash equivalent account if they are maintained for the current operation of the business. Cash is classified as a current asset unless it is restricted fro™ being exchanged or used to settle a liability for at least twelve months after the date of the statement of financial position.Statement of Financial Position © Cash equivalents are short-term liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. An investment qualifies as a cash equivalent only when it has a short maturity of three months or less from the date of acquisition. The following are examples of cash equivalents: a. Three-month time deposit b. Three-month money market placement c. Three month BSP treasury bill d. Five-year treasury bill acquired three months before maturity date. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents. For example, preference shares acquired within three months of their maturity and with a specified redemption date. Miscellaneous Topics on Cash and Cash Equivalents Foreign currency The amount of cash in foreign currencies is valued at the current exchange rate and shown either as current asset (part of cash and cash equivalent) or non-current asset. __ If the amount of deposit in foreign currency is not restricted, itis shown as part of the cash and cash equivalent in the current asset section of the statement of financial position. Otherwise, if the amount of deposit in foreign currency is Material and there is restriction to its use, it is shown as a separate item in the non-current asset section of the financial position. Bank Overdraft : Bank overdraft is the result of the over issuance of checks 8ainst the amount of deposits in the bank bringing a credit lance in the cash in the bank account.© Financial Accounting and Reporting Generally, bank overdraft should not be offset against othe; bank accounts with debit balance unless the amount involve is immaterial or the two or several bank accounts are maintained in the same bank and one of the accounts has a credit balance, The bank overdraft is shown as part of current liability. Postdated Checks Postdated checks received by the company as payment from the customer of goods or services shall not form part of cash or cash equivalent. This item is considered as trade and other receivables, The entry on the issuance of postdated checks by the company as payment for goods or services to suppliers shall be reversed. The amount of cash shall be debited and the liability account shall be credited. Compensating Balance This amount represents the required balance to be maintained by the borrower with the bank in connection with a loan. If there is no restriction to the use or withdrawal, the compensating balance is shown as part of the cash and cash equivalent account. If there is restriction as to withdrawal and the related loan is short-term, the amount is separately shown in the current asset section. However, if the related loan is long-term and there is restriction to its use, the amount is shown as part of the investment in the non-current assets section of the statement of financl@ position. Financial Assets on jon, PAS 32, Financial Instrument: Disclosure and Presentati defines financial assets as any asset that is in the form of: a. cash; b. equity instrument of another entity; c. acontractual right; ~, . . ym ano’ * to receive cash or other financial assets fro entity; orStatement of Financial Position @ * toexchange financial assts or financial liabilities with another entity under conditions that are potentially favorable to the entity; and da contract that will or may be settled in the entity's own equity instrument and is * a non-derivative for which the entity 1s obliged to receive a variable number of the entity’s own equity instrument; or * a derivative that will or may be settled other than by the exchange of a fixed amount of cash or other financial assets for a fixed number of the entity’s own equity instrument An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting, all of its liabilities. A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Based on the definition of financial instrument in PAS 32, the term financial instrument, therefore, includes financial assets, financial liabilities, and equity instruments. Categories of Financial Assets Financial assets are broadly classified into 1. financial assets at fair value; and 2. financial assets at amortized cost. Financial assets at fair value Financial assets are fair value which include: a. those held for trading, b. those whose designations at initial recognition are at fair value through profit or loss; and c. those investments in quoted equity instruments. 9 Financial assets at fair value are classified as current assets.© Financial Accounting and Reporting Financial assets at amortized cost The financial assets shall be valued at amortized cost provided the following requirements are satisfied: a. it is intended to hold and collect contractual cash flows on a specified date; and b. the contractual cash is solely for payment of principal and interest on the principal amount outstanding. Financial assets at amortized costs are classified as non-current assets as part of long-term investment line item. Trade and Other Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Hence, the value of receivable is not dependent on other transactions, or other form of instruments. Receivables are broadly classified into a. trade receivable; and b. non-trade receivable. Trade receivables arise from the ordinary course of business operations and are shown as current assets if collectible either within one year or within the normal operating cycle of the business whichever is longer. This accounting guideline of item presentation is straightforward. Thus, if a trade receivable is collectible beyond one year or beyond the normal operating cycle of the business, it is presented as a non-current asset. The common examples of trade receivables are accounts receivable and notes receivables. Non-trade receivables, on the other hand, are claims that arise not from the ordinary course of the business operations. This tyPe of receivable is shown as part of the current asset if collectible within one year notwithstanding the normal operating cycle of the business. Non-trade receivable, therefore, relative to the statement presentation, disregards the one-year test.Statement of Financial Position @ . advances to officers, employees, directors, or shareholders; a b. advances to affiliates; Non-trade receivables include: c. claims against common carriers for damages; and d. advances to suppliers, for merchandise. 0 Customers rs with credit balances are classified as current liabilities and should not be offset against customers with debit balances. Inventories The fourth line item usually presented as current asset on the face of the statement of financial position is inventory. PAS 2 defines inventories as assets: a. held for sale in the ordinary course of business; b. in the process of production for such sale; or c. in the form of materials or supplies to be consumed in the production process or in the rendering of services. Measurement of Inventories Inventories shall be measured at the lower of cost and net realizable value. Cost of Inventories The cost of inventories comprises all cost of purchase, cost of conversion, and other costs incurred in bringing the inventories to their present location and condition. The cost of purchase of inventories comprises the purchase Price, import duties and other taxes, and transport, handling and other costs directly attributable to the acquisition of finished 800ds, materials, and services. Trade discounts, rebates, and other Similar items are deducted in determining the cost of purchase.@ Financial Accounting and Reporting The cost of goods purchased is computed as follows: Purchase price XXX, Add: Import duties XXXXX Freight in XXXXX Other business taxes XXXXX Other incidental costs to acquisition xxxxx OOK Total XXXXX Less: Trade discounts XXXXX, Trade allowances XXXXK Purchase rebates XXXXX XXX Cost of acquisition XXXXX The costs of conversion of inventories include costs directly related to the units of production, such as direct materials, direct labor, and manufacturing overhead. These three items are usually called the three elements of costs, and their sum is technically called the total manufacturing costs, The cost of goods that are Processed from raw materials to finished product is computed as follows: Direct materials XXXXX Direct labor HXXKX Factory or manufacturing overhead XXXXX Total Manufacturing costs XXXXX The following Costs, however, are excluded from the cost of inventories and recognized as expenses in the period when they are incurred: 1, Abnormal amounts of wasted materials, labor, or other production costs 2. Storage costs, unless those costs are necessary in the production process before a further production stage 3. Administrative Overhead costs that do not contribute to bringing inventories to their present location and condition 4. Selling costs >Statement of Financial Position © The net realizable value of inventories is equal to the estimated selling price minus the estimated cost of completion and estimated cost to sell. Hence, the net realizable value is computed Net Realizable Value of Inventories as follows: Estimated selling price XXXXX Less: Estimated cost of completion XXXXX Estimated cost to sell XXXXX_ —_ XXXXX Net realizable value XXXXX Determination of Cost of Inventories The cost of inventories as required in the Standard shall be determined by using either: a. first-in, first-out; or b. weighted average. : The value of inventories that should appear in the statement of financial position shall be the lower between cost and net realizable value. Cost is determined using the first-in, first-out method or weighted average method. Figure 3.1 depicts how inventory is valued in the statement of financial position. Value of Inventory in the Statement of Financial Position lower between i poli SS Cost determined using Net realizable value FIFO or weighted average i mast eae Figure 3.1. Value of InventoryFinancial Accounting and Reporting Classes of Inventories The merchandising or trading business entities Benerally labe| their inventories as merchandising inventory. The manufacturing concerns label their inventories as finisheg goods inventory, goods in process inventory, and raw materials inventory, Since the preparation of statement of financial position follows the line item concept, the different classes of inventories are disclosed in the related notes. Prepaid Expenses The term prepaid expenses is a one item line classification that includes all prepayments made that are expected to be consumed within one year from the date of the statement of financial position. Examples of prepaid expenses are prepaid rent, prepaid advertising, and unused office supplies. ILLUSTRATION 3.1 Pro-forma of the Current Asset Section The data of Sample Manufacturing Company for the year ending December 31, 2016 as provided below illustrates the presentation of the current asset section of the statement of financial position. All amounts are assumed. Current assets Cash and cash equivalents (Note 1) 2,500,000 Trading securities 1,000,000 Trade and other receivables (Note 2) 3,000,000 Inventories (Note 3) 2,600,000 Prepaid expenses (Note 4) 50,000 Total current assets 9,150,000 In the notes to the financial statements, the following disclosures shall appear: Note 1 - Cash and cash equivalent Cash on hand 80,000 Cash in bank 2,400,000 Petty cash fund ____20,000 Total cash and cash equivalent _ 2,500,000Statement of Financial Position @ Note 2- Trade and other receivables ‘accounts receivable 2,260,000 Allowance for doubtful accounts (100,000) Notes receivable 800,000 accrued interest on notes receivable 40,000 Total trade and other receivables Note 3 - Inventories Finished goods 1,780,000 Goods in process 450,000 Raw materials 320,000 Factory supplies 50,000 Total inventories Note 4 - Prepaid expenses Unused office supplies Prepaid rent Total prepaid expenses COMPOSITION OF NON-CURRENT ASSETS Property, plant, and equipment (PPE) PAS 16 defines property, plant, and equipment as tangible items that are a. held for use in the production or supply of goods or services for rental to others, or for administrative purposes; and b. expected to be used during more than one period. Measurement of PPE at Recognition An item of property, plant, and equipment that qualifies for Tecognition as an asset shall be measured at its cost. The cost of an item of property, plant, and equipment Comprises a. its purchase price, including import duties and non- tefundable purchases taxes, after deducting trade discounts and rebates.© Financial Accounting and Reporting b. any cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating, in the manner intended by management. c. the initial estimate of the cost of dismantling and removing the item and restoring the site on which it js located. Examples of directly attributable costs: * Cost of employee benefits arising directly from the construction or acquisition of the item of property, plant, and equipment Cost of site preparation Initial delivery and handling costs Installation and assembly costs Cost of testing whether the asset is functioning properly Examples of costs that are not costs of an item of property, plant, and equipment: * Cost of opening a new facility * Cost of introducing a new product or service * Cost of conducting business in a new location including cost of staff training * Administration and other general overhead costs Measurement of PPE after Recognition An entity shall choose either the cost model or the revaluation mode as its accounting policy and shall apply that policy to a" entire class of property, plant, and equipment. In other words, subsequent to the date of acquisition, an entity may either choose the cost method or revaluation method in valuing its property, plant, and equipment. The method selected shall be applied uniformly to the entire class. For example, if cost method is used to value the machinery, then all machineries shall be measured using such method. Cost Model ale t; After recognition as an asset, an item of property, plant, and equipment shall be carried at its cost less any accumulate depreciation and any accumulated impairment loss.Statement of Financial Position © The carrying value of property, plant, and equipment shall be puted as follows: com) Cost XXXXX Less: Accumulated depreciation —xxxxx Impairment loss XXXXX —_ XXXXX Carrying book value XXXXX Revaluation Model After recognition as an asset, an item of property, plant, and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluation shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which will be determined using fair value at the date of the statement of financial position. If an item of property, plant, and equipment is revalued, the entire | class of property, plant, and equipment to which that asset belongs | shall be revalued, A class of property, plant, and equipment is a grouping of assets of a similar nature and use in an entity’s operation. The following are examples of separate classes: 1. land . land and buildings . machinery . Ships - Motor vehicles 2 3 4, 5. aircraft 6. 7. furniture and fixtures 8 } office equipment od an asset's carrying amount is increased as a result of oa the increase shall be credited directly to equity shal e heading of revaluation surplus. However, the increase Tecognized in profit or loss to the extent that it reverses