General Concepts

Under IFRS, assets and liabilities are recorded at cost or fair value at inception in the financial statements, which for assets and liabilities arising from arm's‐length transactions will generally be equal to negotiated prices. Subsequent measurement is under the historical cost principle or fair value, depending on the requirements of the relevant standard and available accounting policy choices made by the entity. IAS 36, Impairment of Assets, requires assets to be reduced in value if their carrying value exceeds the higher of fair value or value in use (expected future cash flows from the asset). IFRS 9, Financial Instruments, IAS 40, Investment Property, and IAS 41, Agriculture, all include some element of subsequent measurement at fair value. Where assets are classified as held‐for‐sale, they are carried at the lower of their carrying amount or fair value less selling costs (IFRS 5).

Historical exchange prices, and the amortised cost amounts which are later presented, are sometimes cited as being useful because these amounts are objectively determined and capable of being verified independently. However, critics point out that, other than at transaction date, historical cost does not result in presenting, in the statement of financial position, numbers which are comparable between companies so, while they are reliable, they may not be relevant for decision‐making purposes. This captures the fundamental conflict regarding accounting information: absolutely reliable or objective information may not be sufficiently relevant to current decision making.

Structure and Content

The titles commonly given to the primary financial statement which presents the state of an entity's financial affairs include the “statement of financial position” or “balance sheet.” The revised IAS 1 changed the title of the “balance sheet” to the “statement of financial position,” the title used throughout this publication. The IASB concluded that “statement of financial position” better reflects the function of the statement and is consistent with the Conceptual Framework. In addition, the title “balance sheet” simply reflected the convention that double entry bookkeeping requires all debits to equal all credits and did not identify the content or purpose of the statement. According to the IASB, the term “financial position” was a well‐known and accepted term and had already been used in audit opinions internationally for more than 20 years to describe what the “balance sheet” presents.

The three elements which are always to be displayed in the heading of a statement of financial position are:

1. The name of the entity whose financial position is being presented;
2. The title of the statement; and
3. The date of the statement.

The entity's name should appear exactly as written in the legal document which created it (e.g., the certificate of incorporation, partnership agreement, etc.). The title should also clearly reflect the legal status of the entity as a corporation, partnership, sole proprietorship or division of some other entity.

The statement of financial position presents a “snapshot” of the resources (assets) and claims to resources (liabilities and equity) as at a specific date. The last day of a month is normally used as the statement date (in jurisdictions where a choice is allowed) unless the entity uses a fiscal reporting period always ending on a particular day of the week, such as a Friday or Sunday (e.g., the last Friday in December, or the Sunday falling closest to December 31). In these cases, the statement of financial position can be dated accordingly (e.g., December 26, October 1, etc.). In all cases, the implication is that the statement of financial position captures the pertinent amounts as at the close of business on the date noted.

Statements of financial position should generally be uniform in appearance from one period to the next, as indeed should all of the entity's financial statements. The form, terminology, captions and pattern of combining insignificant items should be consistent. The goal is to enhance usefulness by maintaining a consistent manner of presentation unless there are good reasons to change these and the changes are duly reported.

IAS 1 does not prescribe the sequence or format in which items should be presented in the statement of financial position. Thus, for example, in a standard classified statement of financial position, non‐current assets may be presented before or after current assets, and within the current assets, cash can be presented as the first or the last line item. However, the standard stipulates the following list of minimum line items, which are sufficiently different in nature or function to justify separate presentation in the statement:

1. Property, plant and equipment;
2. Investment property;
3. Intangible assets;
4. Financial assets (excluding amounts shown under items 5, 8 and 9);
5. groups of contracts within the scope of IFRS 17;
6. Investments accounted for using the equity method;
7. Biological assets (within the scope of IAS 41);
8. Inventories;
9. Trade and other receivables;
10. Cash and cash equivalents;
11. The total of assets classified as held‐for‐sale and assets included in disposal groups classified as held‐for‐sale in accordance with IFRS 5, Non‐current Assets Held for Sale and Discontinued Operations;
12. Trade and other payables;
13. Provisions;
14. Financial liabilities (excluding amounts shown under items 11 and 12);
15. Liabilities and assets for current tax, as defined in IAS 12, Income Taxes;
16. Deferred tax liabilities and deferred tax assets, as defined in IAS 12;
17. Liabilities included in disposal groups classified as held‐for‐sale in accordance with IFRS 5;
18. Non‐controlling interests, presented within equity; and
19. Issued capital and reserves attributable to owners of the parent.

The format of the statement of financial position as illustrated by the appendix to IAS 1 is along the following lines:

Current Assets

An asset should be classified as a current asset when it satisfies any one of the following:

1. It is expected to be realised in, or is held for sale or consumption in, the normal course of the entity's operating cycle;
2. It is held primarily for trading purposes;
3. It is expected to be realised within 12 months of the end of the reporting period;
4. It is cash or a cash equivalent asset, which is not restricted in its use.

If a current asset category includes items that will have a life of more than 12 months, the amount that falls into the next financial year should be disclosed in the notes. All other assets should be classified as non‐current assets if a classified statement of financial position is to be presented in the financial statements.

Thus, current assets include cash, cash equivalents and other assets that are expected to be realised in cash, or sold or consumed during one normal operating cycle of the business. The operating cycle of an entity is the time between the acquisition of materials entering into a process and their realisation in cash or an instrument which is readily convertible into cash. Inventories and trade receivables should still be classified as current assets in a classified statement of financial position even if these assets are not expected to be realised within 12 months from the end of the reporting period. However, marketable securities could only be classified as current assets if they were expected to be realised (sold, redeemed or to mature) within 12 months after the end of the reporting period, even though most would deem marketable securities to be more liquid than inventories and possibly even more liquid than receivables. Management intention takes priority over liquidity potential. The following items would be classified as current assets:

1. Inventories held either for sale in the ordinary course of business or in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services (IAS 2). The basis of valuation and the method of pricing, which is limited to FIFO or weighted‐average cost, should be disclosed.

   Inventories—at the lower of cost (FIFO) or net realisable value

   X

   In the case of a manufacturing concern, raw materials, work in process and finished goods should be disclosed separately on the statement of financial position or in the footnotes.

   Inventories	202X	202X‐1
   	€	€
   Finished goods	X	X
   Work in process	X	X
   Raw materials	X	X
   Total	XX	XX

2. Receivables, including accounts and notes receivable, receivables from affiliate companies and officer and employee receivables. The term accounts receivable represents amounts due from customers arising from transactions in the ordinary course of business. Allowances due to expected lack of collectability and any amounts discounted or pledged should be stated clearly. If material, the receivables should be analysed into their component parts. The receivables section may be presented as follows:

   Receivables			202X	202X‐1
   			€	€
   Customer accounts	X			X
   Customer notes/commercial paper	X	X		X
   Less allowance for expected credit loss		(X)		(X)
   			X	X
   Due from associated companies			X	X
   Due from officers and employees			X	X
   Total			X	X

3. Prepaid expenses: these are assets created by the prepayment of cash or the incurrence of a liability. They expire and become expenses with the passage of time, use or events (e.g., prepaid rent, prepaid insurance and deferred taxes). This item is frequently aggregated with others on the face of the statement of financial position with details relegated to the notes, since it is often not a material amount.
4. Trading financial assets: assets which are acquired principally for the purpose of generating a profit from short‐term fluctuations in price or dealer's margin. Trading financial assets should be classified as fair value through profit or loss. Trading assets include debt and equity securities and loans and receivables acquired by the entity with the intention of making a short‐term profit. Derivative financial assets are always deemed held‐for‐trading unless they are designated as effective hedging instruments.
5. Cash and cash equivalents, including cash in hand, consisting of coins, notes and undeposited cheques; money orders and drafts; and deposits in banks. Anything accepted by a bank for deposit would be considered cash. Cash must be available for withdrawal on demand; thus, assets such as certificates of deposit would not be considered cash because of the time restrictions on withdrawal. Also, to be classified as a current asset, cash must be available for current use. According to IAS 1, cash which is restricted in use and whose restrictions will not expire within the operating cycle, or cash restricted for a non‐current use, would not be included in current assets. According to IAS 7, cash equivalents include short‐term, highly liquid investments, which are: (1) readily convertible to known amounts of cash, and (2) so near their maturity (original maturities of three months or less) that they present negligible risk of changes in value arising from changes in interest rates. Treasury bills, commercial paper and money market funds are all examples of cash equivalents.

Non‐Current Assets

IAS 1 uses the term “non‐current” to include tangible, intangible, operating and financial assets of a long‐term nature. It does not prohibit the use of alternative descriptions, as long as the meaning is clear. Non‐current assets include:

• Financial assets;
• Investment property;
• Property, plant and equipment;
• Intangible assets;
• Assets held for sale; and
• Miscellaneous other assets.

Other Assets

An all‐inclusive heading for amounts which do not fit neatly into any of the other asset categories (e.g., long‐term deferred expenses, which will not be consumed within one operating cycle, and deferred tax assets).

Current Liabilities

According to IAS 1, a liability should be classified as a current liability when:

1. It is expected to be settled in the normal course of business within the entity's operating cycle;
2. It is due to be settled within 12 months of the date of the statement of financial position;
3. It is held primarily for the purpose of being traded; or
4. The entity does not have a right to defer settlement (at the end of a reporting period) beyond 12 months. Note that the terms of a liability that could at the option of the counterparty result in its settlement by the issue of equity instruments do not affect its classification.

All other liabilities should be classified as non‐current liabilities. Obligations which are due on demand or are callable at any time by the lender are classified as current regardless of the present intent of the entity or of the lender concerning early demand for repayment. Current liabilities also include:

1. Obligations arising from the acquisition of goods and services entering into the entity's normal operating cycle (e.g., accounts payable, short‐term notes payable, wages payable, taxes payable and other miscellaneous payables);
2. Collections of money in advance for the future delivery of goods or performance of services, such as rent received in advance and unearned subscription revenues;
3. Other obligations maturing within the current operating cycle, such as the current maturity of bonds and long‐term notes.

Certain liabilities, such as trade payables and accruals for operating costs, which form part of the working capital used in the normal operating cycle of the business, are to be classified as current liabilities even if they are due to be settled more than 12 months from the date of the statement of financial position.

Other current liabilities which are not settled as part of the operating cycle, but which are due for settlement within 12 months of the date of the statement of financial position, such as dividends payable and the current portion of long‐term debt, should also be classified as current liabilities. However, interest‐bearing liabilities which provide the financing for working capital on a long‐term basis and are not scheduled for settlement within 12 months should not be classified as current liabilities.

IAS 1 provides another exception to the general rule that a liability due to be repaid within 12 months from the end of the reporting period should be classified as a current liability. If the original term was for a period longer than 12 months and the entity intended to refinance the obligation on a long‐term basis prior to the date of the statement of financial position, and that intention is supported by an agreement to refinance, or to reschedule payments, which is completed before the financial statements are approved, then the debt is to be reclassified as non‐current as at the date of the statement of financial position.

However, an entity would continue to classify as current liabilities its long‐term financial liabilities when they are due to be settled within 12 months, if an agreement to refinance on a long‐term basis was made after the date of the statement of financial position. Similarly, if long‐term debt becomes callable as a result of a breach of a loan covenant, and no agreement with the lender to provide a grace period of more than 12 months has been concluded by the date of the statement of financial position, the debt must be classified as current.

The distinction between current and non‐current liquid assets generally rests upon both the ability and the intent of the entity to realise or not to realise cash for the assets within the traditional one‐year time frame. Intent is not of similar significance with regard to the classification of liabilities, however, because the creditor has the legal right to demand satisfaction of a currently due obligation, and even an expression of intent not to exercise that right does not diminish the entity's burden should there be a change in the creditor's intention. Thus, whereas an entity can control its use of current assets, it is limited by its contractual obligations with regard to current liabilities and, accordingly, accounting for current liabilities (subject to the two exceptions noted above) is based on legal terms, not expressions of intent.

Non‐Current Liabilities

Non‐current liabilities are obligations which are not expected to be settled within the current operating cycle, including:

1. Obligations arising as part of the long‐term capital structure of the entity, such as the issuance of bonds, long‐term notes and lease obligations;
2. Obligations arising out of the normal course of operations, such as pension obligations, decommissioning provisions and deferred taxes; and
3. Contingent obligations involving uncertainty as to possible expenses or losses. These are resolved by the occurrence or non‐occurrence of one or more future events which confirm the amount payable, the payee and/or the date payable. Contingent obligations include such items as product warranties (see the section on provisions below).

For all long‐term liabilities, the maturity date, nature of obligation, rate of interest and description of any security pledged to support the agreement should be clearly shown. Also, in the case of bonds and long‐term notes, any premium or discount should be reported separately as an addition to or subtraction from the par (or face) value of the bond or note. Long‐term obligations which contain certain covenants, which must be adhered to, are classified as current liabilities if any of those covenants have been violated and the lender has the right to demand payment. Unless the lender expressly waives that right or the conditions causing the default are corrected, the obligation is current.

Offsetting Assets and Liabilities

In general, assets and liabilities may not be offset against each other. However, the reduction of accounts receivable by the allowance for expected credit losses, or of property, plant and equipment by the accumulated depreciation, are procedures that reduce these assets by the appropriate valuation amounts and are not in fact the offsetting of assets and liabilities.

Only where there is an actual right of setoff is the offsetting of assets and liabilities a proper presentation. This right of setoff exists only when all of the following conditions are met:

1. Each of the two parties owes the other determinable amounts (although they may be in different currencies and bear different rates of interest);
2. The entity has the right to set off against the amount owed by the other party;
3. The entity intends to offset; and
4. The right of setoff is legally enforceable.

The laws of certain countries, including some bankruptcy laws, may impose restrictions or prohibitions against the right of setoff. Furthermore, when maturities differ, only the party with the nearest maturity can offset because the party with the longer maturity must settle in the manner determined by the earlier maturity party.

The question of setoff is sometimes significant for financial institutions which buy and sell financial instruments, often repackaging them as part of the process. IFRS 9 provides detailed rules for determining when derecognition is appropriate and when financial assets and financial liabilities must be retained on the statement of financial position.

Share Capital

This consists of the par or nominal value of preference and ordinary shares. The number of shares authorised, the number issued and the number outstanding should be clearly shown. For preference share capital, the preference features must also be stated, as the following example illustrates:

Preference share capital that is redeemable at the option of the holder should not be treated as a part of equity—rather, it should be reported as a liability. IAS 32 makes it clear that substance prevails over form in the case of compound financial instruments; any instrument which includes a contractual obligation for the entity to deliver cash is considered to be a liability.

Retained Earnings

This represents the accumulated earnings since the inception of the entity, less any earnings distributed to owners in the form of dividends. In some jurisdictions, notably in continental Europe, the law requires that a portion of retained earnings, equivalent to a small proportion of share capital, be set aside as a legal reserve. Historically, this was intended to limit dividend distributions by young or ailing businesses. This practice is expected to wane, and in any event is not congruent with financial reporting in accordance with IFRS and with the distinction made between equity and liabilities.

Also included in the equity section of the statement of financial position is treasury stock representing issued shares that have been reacquired by the issuer in jurisdictions where the purchase of the entity's own shares and holding in treasury is permitted by law. These shares are generally stated at their cost of acquisition as a reduction of shareholders’ equity.

Finally, some elements of comprehensive income, the components of other comprehensive income, are reported in equity. These components of other comprehensive income include net changes in the fair values of financial assets classified at fair value through other comprehensive income, unrealised gains or losses on translations of the financial statements of subsidiaries denominated in a foreign currency, net changes in revaluation surplus, actuarial gains and losses on defined benefit plans, and the effective portion of gains and losses on hedging instruments in a cash flow hedge. In accordance with the revised IAS 1, net changes in all items of other comprehensive income should be reported in a new statement called the “statement of profit or loss and other comprehensive income,” and accumulated balances in these items are reported in equity. (For a detailed discussion of the statement of profit or loss and other comprehensive income, refer to Chapter 5.)

Non‐controlling interests should be shown separately from owners’ equity of the parent company in group accounts (i.e., consolidated financial statements), but are included in the overall equity section.

Disclosure of Share Capital

An entity is required to disclose information which enables the users of its financial statements to evaluate the entity's objectives, policies and processes for managing capital. This information should include a description of what the entity manages as capital, and the nature of externally imposed capital requirements, if there are any, as well as how those requirements are incorporated into the management of capital. Additionally, summary quantitative data about what the entity manages as capital should be provided as well as any changes in the components of capital and methods of managing capital from the previous period. The consequences of non‐compliance with externally imposed capital requirements should also be included in the notes. All these disclosures are based on the information provided internally to key management personnel.

An entity should also present either in the statement of financial position or in the statement of changes in equity, or in the notes, disclosures about each class of share capital as well as about the nature and purpose of each reserve within equity. Information about share capital should include the number of shares authorised and issued (fully paid or not fully paid); par value per share or that shares have no par value; the rights, preferences and restrictions attached to each class of share capital; shares in the entity held by the entity (treasury shares) or by its subsidiaries or associates; and shares reserved for issue under options and contracts (including terms and amounts).