Entity's Name

The entity's legal name appears in the heading exactly as specified in the document that created it (e.g., the certificate of incorporation, partnership agreement, LLC operating agreement, etc.). The legal form of the entity is often evident from its name when the name includes such designations as “incorporated,” “LLP,” or “LLC.” Otherwise, the legal form is either captioned as part of the heading or disclosed in the notes to the financial statements. A few examples are as follows:

ABC Company

(a general partnership)

ABC Company

(a sole proprietorship)

ABC Company

(a division of DEF, Inc.)

The use of the titles “statement of financial position,” “balance sheet,” or “statement of financial condition” infers that the statement is presented using generally accepted accounting principles. If, instead, some financial reporting framework, such as income tax basis or cash basis is used, the financial statement title must be revised to reflect this variation. The use of a title such as “Statements of Assets and Liabilities—Income Tax Basis” is necessary to differentiate the financial statement being presented from a GAAP statement of financial position.

Date

The last day of the fiscal period is used as the statement date. Usually, this is a month-end date unless the entity uses a fiscal reporting period always ending on a particular day of the week such as Friday or Sunday. In these cases, the statement of financial position would be dated accordingly (i.e., December 26, October 1, etc.).

Consistency of Format

Statements of financial position generally are uniform in appearance from one period to the next with consistently followed form, terminology, captions, and patterns of combining insignificant items. If changes in the manner of presentation are made when comparative statements are presented, the prior year's information must be restated to conform to the current year's presentation.

Current Assets

Current assets are cash and other assets that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business (ASC 210-10-05-4). When the normal operating cycle is less than one year, a one-year period is used to distinguish current assets from noncurrent assets. When the operating cycle exceeds one year, the operating cycle will serve as the proper period for purposes of current asset classification. When the operating cycle is very long, the usefulness of the concept of current assets diminishes. The following items are classified as current assets:

1. Cash and cash equivalents include cash on hand consisting of coins, currency, undeposited checks; money orders and drafts; demand deposits in banks; and certain short-term, highly liquid investments. Any type of instrument accepted by a bank for deposit would be considered to be cash. Cash must be available for withdrawal on demand. Cash that is restricted as to withdrawal, such as certificates of deposit, would not be included with cash because of the time restrictions. Cash must be available for current use in order to be classified as a current asset. Cash that is restricted in use would not be included in cash unless its restrictions will expire within the operating cycle. Cash restricted for a noncurrent use, such as cash designated for the purchase of property or equipment, would not be included in current assets. Cash equivalents include short-term, highly liquid investments that:
   1. are readily convertible to known amounts of cash, and
   2. are so near their maturity (maturities of three months or less from the date of purchase by the entity) that they present negligible risk of changes in value because of changes in interest rates.

   U.S. Treasury bills, commercial paper, and money market funds are all examples of cash equivalents. Only instruments with original maturity dates of three months or less qualify as cash equivalents (ASC 205-10-45-1).

2. Short-term investments are readily marketable debt and equity securities. To be classified as current assets, management must be willing and able to sell the security to meet current cash needs, or the investment must mature within one year (or the operating cycle, if longer). These securities are accounted for under ASC 320. Securities classified as trading securities must be reported as current assets. Securities classified as held-to-maturity or available-for-sale are reported as either current or noncurrent depending upon management's intended holding period, the security's maturity date (if any), or both. It is not necessary to show the ASC 320 classification on the face of the statement of financial position. Short-term investments can be combined into a single line if the classification details appear in the notes to the financial statements. The statement of financial position presentation might be as follows:

   Marketable securities

   $xxx

3. Receivables include accounts and notes receivable, receivables from affiliated entities, and officer and employee receivables. The term “accounts receivable” is generally understood to represent amounts due from customers arising from transactions in the ordinary course of business (sometimes referred to as “trade receivables”). Valuation allowances, if any, are to be clearly stated. Estimates of needed allowances for uncollectibility may be based on historical correlations of bad debt experience as a percentage of sales or based on a direct credit quality analysis of the receivables. Valuation allowances to reflect the time value of money (discounts) are reported with the related receivable. If material, the different components that comprise receivables are to be separately stated. Receivables pledged as collateral are to be disclosed in the notes to the financial statements. The receivables section of a statement of financial position might be presented as follows:

   Receivables:
   Accounts	$xxx
   Notes	xxx
   	xxx
   Less allowance for uncollectible accounts	(xxx)
   	xxx
   Affiliated companies	xxx
   Officers and employees	xxx
   	$xxx

4. Inventories are goods on hand and available-for-sale. The basis of valuation and the method of pricing are to be disclosed. One form of presentation is as follows:

   Inventories—at the lower of cost or market (specific identification)

   $xxx

   In the case of a manufacturing concern, raw materials, work in process, and finished goods must be stated separately on the statement of financial position or disclosed in the notes to the financial statements. Customarily, the components of manufacturing inventories are stated in order of their readiness for sale and ultimate conversion to cash—that is, finished goods are ready for sale, work in process is closer to being finished than raw materials and, of course, raw materials have not yet been placed into production. The disclosures must also include the basis upon which the amounts are stated and where practical the method of determining cost. A sample form of presentation is as follows:

   Inventories:
   Finished goods	$xxx
   Work in process	xxx
   Raw materials	xxx
   	$xxx

5. Prepaid expenses are amounts paid in advance to secure the use of assets or the receipt of services at a future date. Prepaid expenses will not be converted to cash, but they are classified as current assets because, if not prepaid, they would have required the use of current assets during the coming year or operating cycle, if longer (ASC 205-10-45-2). Prepaid rent and prepaid insurance are the most common examples of prepaid expenses.

Noncurrent Assets

ASC 205-10-45-4 excludes the following from current assets:

1. Cash and claims to cash that are
   • restricted as to withdrawal or use for other than current operations,
   • designated for expenditure in the acquisition or construction of noncurrent assets, or
   • segregated for the liquidation of long-term debts.

   Even though not actually set aside in special accounts, funds that are clearly to be used in the near future for the liquidation of long-term debts, payments to sinking funds, or for similar purposes shall also, under this concept, be excluded from current assets. However, if such funds are considered to offset maturing debt that has properly been set up as a current liability, they may be included within the current asset classification.

2. Receivables arising from unusual transactions (such as the sale of capital assets, or loans or advances to affiliates, officers, or employees) that are not expected to be collected within 12 months.
3. Investments that are intended to be held for an extended period of time (longer than one operating cycle). The following are the three major types of long-term investments:
   1. Debt and equity securities – stocks, bonds, and long-term notes receivable. Securities that are classified as available-for-sale or held-to-maturity investments under ASC 320 would be classified as long-term if management intended to hold them for more than one year. Under ASC 320, the categories of these securities (held-to-maturity versus available-for-sale) need not be reported on the face of the statement of financial position if they are reported in the notes to the financial statements. The securities section of the statement of financial position could be presented as follows:

      Long-term investments:
      Investments in A company common stock		$xxx
      Notes receivable	$ xxx
      Less discount on notes receivable	(xxx)	xxx
      Investment in B company bonds		xxx
      		$xxx

   2. Tangible assets not currently used in operations (e.g., land purchased as an investment and held for sale).
   3. Investments held in special funds (e.g., sinking funds, pension funds, amounts held for plant expansion, and cash surrender values of life insurance policies).
4. Property, plant, and equipment. These are disclosed with related accumulated depreciation/depletion as follows:

   Property, plant, and equipment	$xxx
   Less accumulated depreciation	(xxx)
   Or	$xxx
   Property, plant, and equipment (net of $xxx accumulated depreciation)	$xxx

   Accumulated depreciation may be shown in total or by major classes of depreciable assets. In addition to showing this amount on the statement of financial position, the notes to the financial statements must disclose the amounts of major classes of depreciable assets, by nature or function, at the date of the statement of financial position. Assets under capital leases are separately disclosed. A general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets (ASC 360-10-50) must be included in the notes to financial statements.

5. Intangible assets include legal and/or contractual rights that are expected to provide future economic benefits and purchased goodwill. Patents, copyrights, logos, and trademarks are examples of rights that are recognized as intangible assets. Intangible assets with finite useful lives are amortized to expense over those lives. Generally, the amortization of an intangible asset is credited directly to the recorded amount of the asset although it is acceptable to use an accumulated amortization valuation allowance. Intangible assets with indefinite economic useful lives are tested for impairment at least annually.
6. Other assets. An all-inclusive heading that incorporates assets that do not fit neatly into any of the other asset categories (e.g., long-term prepaid expenses, deposits made to purchase equipment, deferred income tax assets (net of any required valuation allowance), bond issue costs, noncurrent receivables, and restricted cash).

Current Liabilities

Obligations are classified as current if their liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets or to create other current obligations (ASC 210-45-5). Current liabilities also includes obligations that are due on demand or that are callable at any time by the lender and are classified as current regardless of the intent of the entity or lender. ASC 470-10-45 includes more guidance on those and on short-term debt expected to be refinanced (ASC 205-10-45-7). The following items are classified as current liabilities:

1. Accounts payable. Accounts payable is normally comprised of amounts due to suppliers (vendors) for the purchase of goods and services used in the ordinary course of running a business.
2. Trade notes payable are also obligations that arise from the purchase of goods and services. They differ from accounts payable because the supplier or vendor finances the purchase on terms longer than the customary period for trade payables. The supplier or vendor generally charges interest for this privilege. If interest is not charged, it is imputed in accordance with ASC 835.

   A valuation allowance is used to reduce the carrying amount of the note for the resulting discount as follows:

   Notes payable, net of imputed interest of $xx		$xxx
   Or
   Notes payable	$ xxx
   Less discounts	(xxx)	$xxx

3. Accrued expenses represent estimates of expenses incurred on or before the date of the statement of financial position that have not yet been paid and that are not payable until a succeeding period within the next year. Examples of accrued expenses include salaries, vacation pay, interest, and retirement plan contributions.
4. Dividends payable are obligations to distribute cash or other assets to shareholders that arise from the declaration of dividends by the entity's board of directors.
5. Advances and deposits are collections of cash or other assets received in advance to ensure the future delivery of goods or services. Advances and deposits are classified as current liabilities if the goods and services are to be delivered within the next year (or the operating cycle, if longer). Advances and deposits include such items as advance rentals and customer deposits. Certain advances and deposits are sometimes captioned as deferred or unearned revenues.
6. Agency collections and withholdings are liabilities that arise because the entity acts as an agent for another party. Employee tax withholdings, sales taxes, and wage garnishments are examples of agency collections.
7. Current portion of long-term debt is the portion of a long-term obligation that will be settled during the next year (or operating cycle, if longer) by using current assets. Generally, this amount includes only the payments due within the next year under the terms of the underlying agreement. However, if the entity has violated a covenant in a long-term debt agreement and, as a result, the investor is legally entitled to demand payment, the entire debt amount is classified as current unless the lender formally (in writing) waives the right to demand repayment of the debt for a period in excess of one year (or one operating cycle, if longer). In two cases, obligations to be paid in the next year are not classified as current liabilities. Debt expected to be refinanced through another long-term issue and debt that will be retired through the use of noncurrent assets, such as a bond sinking fund, are treated as noncurrent liabilities because the liquidation does not require the use of current assets or the creation of other current liabilities.

Noncurrent Liabilities

Obligations that are not expected to be liquidated within one year (or the current operating cycle, if longer) are classified as noncurrent. The following items would be classified as noncurrent:

1. Notes and bonds payable are obligations that will be paid in more than one year (or one operating cycle, if longer).
2. Capital lease obligations are contractual obligations that arise from obtaining the use of property or equipment via a capital lease contract.
3. Written put options on the option writer's (issuer's) equity shares and forward contracts to purchase an issuer's equity shares that require physical or net cash settlement are classified as liabilities on the issuer's statement of financial position. The obligation is classified as noncurrent unless the date at which the contract will be settled is within the next year (or operating cycle, if longer).
4. Certain financial instruments that embody an unconditional obligation to issue a variable number of equity shares and financial instruments other than outstanding shares that embody a conditional obligation to issue a variable number of equity shares are classified as a liability in the issuer's statement of financial position. The obligation is classified as noncurrent unless the date at which the financial instrument will be settled is within the next year (or operating cycle, if longer).
5. Contingent obligations are recorded when it is probable that an obligation will occur as the result of a past event. In most cases, a future event will eventually confirm the amount payable, the payee, or the date payable. The classification of a contingent liability as current or noncurrent depends on when the confirming event will occur and how soon afterwards payment must be made.
6. Mandatorily redeemable shares are recorded as liabilities per ASC 480. A mandatory redemption clause requires common or preferred stock to be redeemed (retired) at a specific date(s) or upon occurrence of an event which is uncertain as to timing although ultimately certain to occur. The obligation is classified as noncurrent unless the date at which the shares must be redeemed is within the next year (or operating cycle, if longer).
7. Other noncurrent liabilities include defined benefit pension obligations, postemployment obligations, and postretirement obligations. Deferred income taxes are liabilities to pay income taxes in the future that result from differences between the carrying amounts of assets and liabilities for income tax and financial reporting purposes.

Bankruptcy

In particular cases, state laws or bankruptcy laws may impose restrictions or prohibitions against the right of setoff (ASC 210-20-45-8).

Taxes Payable

The offsetting of cash or other assets against a tax liability or other amounts due to governmental bodies is acceptable only under the following, limited circumstances:

• When it is clear that a purchase of securities is in substance an advance payment of taxes payable in the near future, and
• The securities are acceptable for the payment of taxes.

Primarily this occurs as an accommodation to governmental bodies that issue tax anticipation notes in order to accelerate the receipt of cash from future taxes (ASC 210-20-45-6 and 7).

Repurchase Agreements

ASC 210-20-45-11 permits the offset of amounts recognized as payables in repurchase agreements accounted for as collateralized borrowings against amounts recognized as receivables in reverse repurchase agreements accounted for as collateralized borrowings with the same counterparty. If certain conditions are met, an entity may, but is not required to, offset the amounts recognized. The additional conditions are

1. The repurchase agreements and the reverse repurchase agreements must have the same explicit settlement date.
2. The repurchase agreements and the reverse repurchase agreements must be executed in accordance with a master netting agreement.
3. The securities underlying the repurchase agreements and the reverse repurchase agreements exist in “book entry” form and can be transferred only by means of entries in the records of the transfer system operator or the security custodian.
4. The repurchase agreements and the reverse repurchase agreements will be settled on a securities transfer system that transfers ownership of “book entry” securities, and banking arrangements are in place so that the entity must only keep cash on deposit sufficient to cover the net payable.
5. Cash settlements for securities transferred are made under established bank arrangements that provide that an entity to have case on deposit for net amounts due at close of business. The entity uses the same account for cash inflows and outflows related to the settlement. (Also see ASC 210-20-45-14 through 17 for additional details.)
6. The same account at the clearing bank is used for the cash inflows of the settlement of the reverse repurchase agreements and the cash outflows in the settlement of the repurchase agreements.

Disclosures

For additional information on disclosures, please see the Appendix to this volume.

Scope

The following requirements apply to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including:

• Bifurcated embedded derivatives,
• Repurchase agreements accounted for as collateralized borrowings and reverse repurchase agreements,
• Securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.

(ASC 210-20-50-1)

Derivatives that fall within one of the scope exceptions in ASC 815 are outside the scope of the offsetting disclosure requirements.

Requirements

Entities must disclose offsetting and related arrangements within the scope outlined above. The requirements apply to financial and derivative instruments that are either offset on the statement of financial position or subject to an enforceable netting arrangement or similar agreement. The disclosures must include:

• Both net and gross information for those assets and liabilities.
• Amounts subject to an enforceable netting arrangement not included in the statement of financial position, instruments that management makes an election not to offset, and the amounts related to financial collateral.

(ASC 210-20-50-3).

Unless another format is more appropriate, the disclosure must be presented in tabular format, separately by assets and liabilities (ASC 210-20-50-4). In addition to the quantitative information, management must present a description of the rights of setoff for recognized assets and liabilities subject to an enforceable master netting or similar arrangement (ASC 210-20-50-5).