INTERMEDIATE ACCOUNTING

3:
Statement of Financial Position
Statement of Financial Position
Statement of financial position is a
formal statement showing the 3
elements comprising financial position,
namely the assets, liabilities and equity.
Current and Noncurrent Distinction
PAS 1, paragraph 60 provides that an entity
shall present current and noncurrent
assets, and current and noncurrent
liabilities, as separate classifications in
statement of financial position.
For some entities, a presentation "based
on liquidity" of assets and liabilities is
faithfully represented and is more relevant.
Assets
An asset is a resource controlled by the
entity as a result of past events and
from which future economic benefits
are expected to flow to the entity.
Current Assets
Current Assets are assets that are:
a.Cash or cash equivalent, unless
restricted from being exchanged or
used to settle a liability for at least
12 months after the reporting period
b. Held primarily for trading
c.Expected to be realized within 12
months after the reporting period; or
d. Expected to be realized, sold, or
consumed in the entity's normal
operating cycle.
Cash and Cash Equivalents
Cash and cash equivalents 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. (Par. 6, PAS 7)
Examples of Cash and Cash Equivalents:
1. Three-month BSP treasury bill
2.Three-year BSP treasury bill
purchased three months before date
of maturity
3. Three-month time deposit
4.Three-month money market
instrument
Held Primarily for Trading
Financial asset is classified as held for
trading when:
1.It is acquired principally for sale in near
term
2.On initial recognition, it is part of the
portfolio of the identified financial
instruments that are managed together
and for which there is evidence of a recent
actual pattern of short-term profit taking.
3. 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
after the reporting period
This refers to short-term non-trade
receivables, or those arising from the
sources other than the sale of
merchandise or service in the ordinary
courses of business.
It is classified as current if collectible
within one year from the end of reporting
period (not withstanding the length of the
operating cycle).
Expected to be realized, sold, or consumed
This refers to trade receivables, inventories
and prepayments. These 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.
Presentation of Current Assets
Current assets are usually listed in the order
of liquidity.
The following are minimum line item:
a. Cash and cash equivalents
b. Financial assets at FVPL
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
Noncurrent Assets
All other assets not classified as
current.

It includes the following:

1. PPE
2. Long-term investments
3. Intangible assets
4. Other non-current assets
5. Deferred tax asset (par. 56, PAS 1)
Property, Plant and Equipment (PPE)
PPE are 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. (Par. 6, PAS 16)
Examples of PPE (or Fixed assets):
1. Land
2. Land Improvement
3. Building
4. Machinery
5. Ship
6. Aircraft
7. Motor Vehicle
8. Furniture and fixtures
9. Office equipment
10. Patterns, molds and dies
11. Tools
12. Bearer plants
Investments
An asset held by an entity for the accretion
of wealth through capital distribution, for
capital appreciation, or for other benefits
such as those obtained through trading
relationship.

It can either be current or noncurrent.

Current Investment
By nature, readily realizable and intended
to be held for not more than one year.

Noncurrent or Long-term investment

Other than a current investment or
investment intended to be held for more
than one year.
Examples of Long-term Investments:
1. Investment in share and bonds
2. Investment in subsidiaries
3. Investment in associates
4. Investment in funds
5.Investment property
6.Cash surrender value of life
insurance policy
7.Investment in joint venture
Intangible Assets
Identifiable non-monetary asset without
physical substance. It 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. (Par. 8, PAS
38)
Examples of Intangible Assets
1. Patent
2. Franchise
3. Copyright
4. Trademark
5. Computer software
Other Noncurrent Assets
Assets that do not fit into the definition of
the previously mention noncurrent
assets.

Examples of Other Noncurrent Assets:

1. Long-term advances to officers,
directors, shareholders and employees
2. Abandoned property
3. Long-term refundable deposit
Liabilities
A liability is a present obligation of an entity
to transfer an economic resource as a result
of past events. (Revised Conceptual
Framework)
Current Liabilities
A liability is as current when:
1. The entity expects to settle the liability
within the entity's normal operating cycle
2. The entity holds the liability primarily
for the purpose of trading
3. The liability is due to be settled within
12 months after the reporting period
4. The entity does not have an
unconditional right to defer settlement of
the liability for at least 12 months after
the reporting period
Examples of Current Liabilities:
1. Held for trading
2. Bank overdraft
3. Dividends payable
4. Income taxes
5. Other nontrade payables
6.Current portion of noncurrent
financial liabilities
Long-term Debt Currently Maturing
A liability which is due to be settled after 12
months after the end of reporting period is
classified as current even if:
1. The original term was for a period longer than 12
months.
2. 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
statement are authorized for issue. (Par. 62, PAS 1)
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 a current liability. (Par. 73, PAS
1)
Covenants
Attached to borrowing agreements
which represent undertakings by the
borrower.

Under these covenants, if certain

conditions relating to the borrower's
financial situation are breached, the
liability becomes payable on demand.
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.
However, 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 12 months after the end of
reporting period.
Presentation of Current Liabilities
Current liabilities include the
following minimum line items:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
Noncurrent Liabilities
All other liabilities not classified as current.
(Par. 69, PAS 1)

Examples of Noncurrent Liabilities:

1. Noncurrent portion of long-term debt
2. Lease liability
3. Long-term obligations to entity officers
4. Long-term deferred revenue
5. Deferred tax liability (Par. 56, PAS 1)
Working Capital
It is the excess of current assets
over current liabilities.
Estimated Liabilities
They are obligations which exist at the end
of reporting period although the amount
is not definite.

May be classified either as current or

noncurrent.
Contingent Liability (Par. 10, PAS 37)
1. Possible obligation arises from past
event 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.
2. 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.
Treatment of Contingent Liability
It is not recognized on financial
statement.

It shall be disclosed only:

1. Brief description of the nature of the
contingent liability
2. An estimate of the financial effects
3. An indication of the uncertainties
that exist
4. Possibility of any reimbursement.
Range of Outcomes:
a. Probable - more than 50% likely to occur
b. Possible - occurrence is 50% or less
c. Remote - least likely or chance is very
slightly; 10% or less

Note: If contingent liability is remote, no disclosure is

necessary. If probable and can be measured reliably,
it is not a contingent liability but shall be recognized
as a provision. Thus, contingent liability is either
probable or measurable but not both.
Contingent Asset
A possible asset that arises from past event
and whose existence be confirmed only by
the occurrence or non-occurrence of one or
more uncertain future events not wholly
within control of the entity. (Par. 10, PAS
37)
Usually arise from unplanned events the
give rise to the possibility of an inflow of
economic benefits to the entity.
Treatment of Contingent Asset
It is not recognized on financial
statement (so as to avoid recognition of
income that may never be realized).
The outcome of contingent asset is
reported as follows:
1. Recognized in the period when it is
realized
2. Only disclosed when it is probable
3. No disclosure is required when it is
possible
4. No disclosure is required when it is
remote
Equity (Net Assets)
Residual interest of owners in the net
assets of an entity after deducting all
liabilities.

Equity = Total assets minus liabilities

Form of Entity:
1. Owner's equity (single proprietorship)
2. Partner's equity (partnership)
3. Shareholder's equity (corporation)
Shareholder’s Equity
PHILIPPINE TERM
Capital stock
Subscribed capital stock
Common stock
Preferred stock
Additional paid in capital
Retained earnings (deficit)
Retained earnings
appropriated
Revaluation surplus
Treasury stock
IAS TERM
Share capital
Subscribed share capital
Ordinary share capital
Preference share capital
Share premium
Accumulated profits
(losses)
Appropriation reserve
Revaluation reserve
Treasury share
Share Capital
Portion of the paid-in capital arising from
issuance of share capital representing the
total par or stated value of the shares
issued.

It could either be ordinary or preference

share capital.
Subscribed Share Capital
Portion of the authorized share capital that
has been subscribed but not yet fully paid
and therefore still unissued.
Subscription Receivable
Reflected preferably as a deduction
from the related subscribed share
capital (but classified as current asset if
collectible within one year)
Share Premium
The capital contributed by the shareholders
in excess of the par or stated value of the
shares subscribed and issued.
Accumulated profits (losses)
Represent cumulative balance of the
periodic net income or loss, dividend
distributions, prior period errors, changes
in accounting policy and other capital
adjustments.

Deficit is a debit balance in Accumulated

profits (losses).
Accumulated profits (losses) could either be
appropriation reserve or unappropriated.
Revaluation Reserve
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 equal to historical

cost minus accumulated depreciation on
cost.
Treasury Shares
Entity's own shares that have been issued
and then reacquired but not canceled.
Reserves
The term "Reserve" is not officially defined
in any accounting standard or in the
Conceptual Framework.

The use of equity reserves is based on

whether a reserve is part of distributable
equity or nondistributable equity.
Example of Reserves:
1. Share premium reserve (or APIC)
2. Appropriation reserve (RE appropriated)
3.Asset revaluation reserve
(RS or Revaluation reserve)
4. OCI reserve
Statement of Financial Position Line Items
(Par. 54, PAS 1)
1. Cash and cash equivalents
2. Financial assets (other than 1, 3 & 6)
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6.Investment in associate (equity
method)
7. Intangible assets
8. Investment property
9. Biological assets
10.Total 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 asset and liability
13. Deferred tax asset and liability
14. Provisions
15.Financial liabilities
(excluding 11 and 14)
16.Liabilities included in disposal group
held for sale
17. Non-controlling interests
18. Share capital and reserves
Note: The listing of the line items is not
exclusive depending on the nature and
liquidity of assets; function of assets
within the entity; and amount, nature and
timing of liabilities.
Forms of Statement of Financial Position
(Par. 57, PAS 1)
The standard does not prescribe the order
or format in which line items are to be
presented.

Two customary forms:

1. Report form
2. Account form
References:

Valix, C., Peralta, J., Valix, C.A. (2020). Intermediate Accounting

Volume 3. Manila City, Phils. GIC Enterprises & Co., Inc.

Valix, C., Peralta, J., Valix, C.A. (2020). Conceptual Framework

and Accounting Standards. Manila City, Phils. GIC Enterprises &
Co., Inc.