CHAPTER 2 :

STATEMENT OF FINANCIAL POSITION

TECHNICAL KNOWLEDGE

Reported by: Maria Angela Caballero

 Learning Objectives:

• 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.
• 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 statement of financial position is a formal statement showing the three
elements comprising financial position, namely assets, liabilities and equity.
• 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.
 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 the statement of financial position.

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.
 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 and in short, assets are properties owned.
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

PAS 1, paragraph 66, provides that an asset as current when:

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.
 CASH AND CASH EQUIVALENTS

This category includes cash on hand, petty cash fund, cash in bank and any
cash equivalent.
PAS 7, paragraph 6, defines 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.
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.
 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
TWELVE 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.
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.
• When the normal operating cycle is not clearly identifiable, the duration is
assumed to be twelve 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.
• 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.
 NONCURRENT ASSETS
• PAS 1, paragraph 66, simply states that an entity shall classify all other assets not
classified as current as noncurrent assets.
• In other words, what is not included in the definition of current assets is deemed
excluded. All others are classified as noncurrent assets.
Accordingly, 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.
The major characteristics of the definition of property, plant and equipment are:
a. The property, plant and equipment are tangible assets, meaning with physical substance.
b. The property, plant and equipment are used in business, meaning used in production or
supply of goods and services, for rental purposes and for administrative purposes.
Assets that are held for sale, including land, or held for investment are not included in
property, plant and equipment.
c. The property, plant and equipment are expected to be used over a period of more than one
year.
The old term for property, plant and equipment is fixed assets.
 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.

• A current investment is an •A noncurrent or long-

investment that is by
nature readily realizable
and is intended to be held
for not more than one
year.
term investment is an
investment other than a
current investment or
investment intended to
be held for more than one
year.
 INTANGIBLE ASSETS
PAS 38, paragraph 8, simply defines an intangible asset as an identifiable
nonmonetary asset without physical substance.
Paragraph 8 further states that "the intangible asset 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". Intangible assets do not have physical substance
but are expected to provide future economic benefits 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.
 OTHER NONCURRENT ASSETS

• Other noncurrent assets are those assets that do not fit into the definition of
the previously mentioned noncurrent assets.

• Examples of other noncurrent assets include long-term advances to officers,

directors, shareholders and employees, or abandoned property and long-
term refundable deposit.
 LIABILITIES
• Under the Revised Conceptual Framework, a liability is defined as a present
obligation of an entity to transfer an economic resource as a result of past
events.

The essential characteristics of a liability are:

a. The entity has a present obligation.
b. The obligation is to transfer an economic resource.
c. The liability arises from past event.
 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.
 LONG-TERM DEBT CURRENTLY
MATURING
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 and before the financial
statements are authorized for issue.
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.
COVENANTS
Covenants are often attached to borrowing agreements
which represent undertakings by the borrower. These
covenants are actually 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 thas 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.
In this context, the 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
• 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
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
No objection can be raised if the trade accounts and notes payable are separately
presented.
 NONCURRENT LIABILITIES
PAS 1, paragraph 69, simply states that all liabilities not classified as current liabilities are
classified as noncurrent liabilities.

Examples of noncurrent liabilities

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.
Working capital
The entity's liquidity is of primary concern to most statement users and this can be properly
evaluated through the current and noncurrent classifications.
Estimated liabilities
Estimated liabilities are obligations which exist at the end of reporting period although the
amount is not definite.
Estimated liabilities may be classified either as current or noncurrent.
Contingent liability
PAS 37, paragraph 10, defines a contingent liability 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.
 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
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.
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
may never be realized.
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 term equity is the residual interest in the assets of the entity after
deducting all of the liabilities.
• Simply stated, equity means net assets or total assets minus 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. Shareholders' equity in a corporation
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.
 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.
• Subscriptions receivable shall preferably be reflected as a deduction from
the related subscribed share capital.
• 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.
• 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
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
Are an entity's own shares that have been issued and then reacquired but not
canceled. The cost of treasury shares shall be reported as a deduction from the
shareholders' equity.
 RESERVES
• The term "reserves" is not officially defined in any accounting standard or in the Conceptual Framework.
• Distributable equity is that portion that can be distributed to shareholders as dividends without
impairing the legal capital of the entity.
• Distributable equity squarely pertains to unappropriated retained earnings.

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
 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
• As the title suggests, the presentation follows that of an account, meaning, the
assets are shown on the left side and the liabilities and equity on the right side
of the statement of financial position.
THANK YOU!