PRESENTATION OF

FINANCIAL
STATEMENTS
CHAPTER 8 PAS 1
Statement of Financial Position
DEFINITION
• A statement of financial position (which is conventionally called
the balance sheet) is a formal statement showing the three
elements comprising financial position, namely assets, liabilities
and equity.

• It is generally described as a detailed expression of the basic

accounting equation: Assets = Liabilities + Equity

• Investors, creditors and other statement users analyze the

statement of financial position to evaluate such factors as liquidity,
solvency and the need of the entity for additional financing.
Current and noncurrent distinction
• An entity shall present current and noncurrent assets, and
current and noncurrent liabilities, as separate classifications in
the statement of financial position. – PAS 1, paragraph 60

• It highlights assets that are expected to be realized within the

current operating cycle, and liabilities that are due for
settlement within the same period.
ELEMENTS OF FINANCIAL
POSITION
• ASSETS
An asset is defined as a resource controlled by the entity as a
result of past event and from which future economic benefits are
expected to flow to the entity.

• 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 provides future economic benefits.
d. The cost of the asset can be measured reliably.
Current Assets
An entity shall classify an asset as current when: (PAS 1, par. 66)
a) The asset is cash or a 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.
Presentation of current assets
• 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 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
Cash and cash equivalents
• This category includes cash on hand, petty cash fund, cash in
bank and any cash equivalent.

Cash equivalents are defined as 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. (PAS 7, par. 6)

An investment normally qualifies as a cash equivalent only when

it has a short maturity of 3 months or less from the date of
acquisition.
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

 Note that what is important is the date of purchase which

should be three months or less before maturity.
 Preference shares with specified redemption date and
acquired three months before redemption date can qualify as
cash equivalents.
Held for trading
• Appendix A of PFRS 9 provides that a financial asset is
classified as held for trading when:
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.
c. It is a derivative, except for a derivative that is a financial
guarantee contract or a designated and an effective hedging
instrument.
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.
• These 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 operating cycle of an entity is the time between the
acquisition of assets for processing and their realization in cash
or cash equivalents.

 Trading entity – 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.
 Manufacturing entity – 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.
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

• PAS 1, paragraph 56, provides that deferred tax asset is

classified as noncurrent asset.
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.

Major characteristics:
a. Tangible assets
b. Used in business
c. Expected to be used over a period of more than one year
Examples of property, plant and
equipment
a. Land
b. Land improvement
c. Building
d. Machinery
e. Ship
f. Aircraft
g. Motor vehicle
h. Furniture and fixtures
i. Office equipment
j. Patterns, molds and dies
k. Tools
l. Book plates
Property, plant and equipment
• After initial recognition, an entity shall choose either the cost
model or the revaluation model as accounting policy and shall
apply that policy to an entire class of property, plant and
equipment.

Cost model – PPE shall be carried at cost less any accumulated

depreciation and any accumulated impairment losses.

Revaluation model – PPE shall be carried at revalued amount or

fair value less any subsequent accumulated depreciation and
subsequent accumulated impairment losses.
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.

Current investment – an investment that is by nature readily

realizable and is intended to be held for not more than one year.
Non-current or long-term investment – 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 securities of other entities, such as shares,
bonds and other debt instruments
b. Investments in subsidiaries
c. Investments in associates accounted for by the equity method
d. Investments in funds accumulated for a particular purpose,
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
nonmonetary asset without physical substance., controlled by the entity as a result
of past event and from which future economic benefits are expected to flow to the
entity.

• PAS 38, paragraph 12, provides that an 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:

Goodwill
Other noncurrent assets
• Other noncurrent assets are those assets that do no 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
ELEMENTS OF FINANCIAL
POSITION
• LIABILITIES
A liability is defined as a present obligation of an entity
arising from past event, the settlement of which is expected to
result in an outflow from the entity of resources embodying
economic benefits.

• The essential characteristics of a liability are:

a. The liability is the present obligation of a particular entity.
b. The liability arises from past event.
c. The settlement of the liability requires an outflow of
resources embodying economic benefits.
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 (Accounts 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
Examples of current liabilities
• Trade payables and accruals for employee and other operating
costs are part of the working capital used in the entity’s normal
operating cycle.
• Other current liabilities are not settled as part of the normal
operating cycle but are due for settlement within twelve
months after the end of reporting period or held primarily for
the purpose of being traded.
Examples: Financial liabilities held for trading, bank
overdraft, dividends payable, income taxes, other nontrade
payable and current portion of noncurrent financial liabilities
Noncurrent liabilities
• PAS 1, paragraph 69, simply states that all liabilities not classified as
current liabilities are classified as noncurrent liabilities

Examples:
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 liability.
Currently maturing Long-term debt
• 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 twelve months.
b. An agreement to refinance or to reschedule payment on a long-
term basis is completed after the end of reporting period
before the financial statements are authorized for issue.

• 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
• PAS 1, paragraph 73, provides that 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.

• 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.
Covenants
• Covenants are often attached to borrowing agreements which
represent undertakings by the borrower. These are restrictions on the
borrower as to undertaking further borrowings, paying dividends,
maintaining specified level of working capital and so forth.
• 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.
• PAS 1, 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.
ELEMENTS OF FINANCIAL
POSITION
• Equity
The term “equity” is the residual interest in the assets of the entity
after deducting all of the liabilities.

• 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. Partners’ equity in a partnership
c. Stockholders’ equity or shareholders’ equity in a corporation

• Under PAS 1, paragraph 7, the holders of instruments classified as

equity are simply known as owners.
Shareholders’ equity
• Shareholders’ equity or stockholders’ equity is the residual
interest of owners in the net assets of a corporation measured
by the excess of assets over liabilities.
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.

• The purpose of the notes to financial statements is “to provide

the necessary disclosures required by the Philippine Financial
Reporting Standards.”
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
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 – This form follows the T-account format
where assets are shown on the left side and the liabilities and
equity on the right side of the statement of financial position
Thank you!