Statement of Financial Position

After Studying this Lesson, you should be able to:

o Know the nature of a Statement of Financial Position
o Understand the current and noncurrent classifications
of assets and liabilities.
o Understand refinancing of a currently maturing debt.
o Identify the components of equity in a corporation.
o Identify the minimum line items in Statement of
Financial Position.
o Prepare a Statement of Financial Position as per PFRS.
A Statement of Financial Position is a formal
statement showing the three elements comprising
financial position, namely Assets, Liabilities and
Equity.
 Identify the reporting entity’s financial strengths and
weaknesses.
 Assess the reporting entity’s liquidity and solvency.
 Assess the reporting entity’s needs for additional financing and
how successful it is likely to be in obtaining that financing.
 Assess management’s stewardship of the entity’s economic
resources.
 Predict how future cash flows will be distributed among those
with a claim against the reporting entity.
 The statement of financial position shows the entity’s financial condition as at
a certain date, it includes line items that present the following amount:
a) Property, plant and equipment
b) Investment property
c) Intangible Assets
d) Financial assets (excluding (e), (h) ad (i);
e) Investments accounted for using the equity method
f) Biological Assets
g) Inventories
h) Trade and other receivables
i) Cash and Cash Equivalents
j) Assets held for sale, including disposal groups
k) Trade and other payables
l) Provisions
m) Financial Liabilities
n) Current Tax liabilities and current tax assets
o) Deferred Tax liabilities and deferred tax assets
p) Liabilities included in disposal groups
q) Non-controlling interests; and
r) Issued capital and reserves attributable to owners of the parent (PAS
1.54)
1. Classified Presentation – shows distinctions between
current and noncurrent assets, and current and
noncurrent liabilities.

1. Unclassified Presentation – shows no distinction

between current and noncurrent items.
Classified Presentation
 Unclassified Presentation

A classified presentation shall be used except when an unclassified

presentation provides information that is reliable and more relevant.
1. Report Form
 This form sets forth the three major sections in a downward
sequence of assets, liabilities and equity.

2. Account Form
 The assets are shown on the left side and the liabilities and
equity on the right side of the statement of financial position
 The carrying amounts of each of the following
categories, as specified in PFRS 9, shall be disclosed
either in the statement of financial position or in the
notes:
a) Financial assets measured at fair value through profit or loss,
showing separately:
i. Those designated as such upon initial recognition or
subsequently in accordance with paragraph 6.7.1 of PFRS 9.
ii. Those measured as such in accordance with the election in
paragraph 3.3.5 of PFRS 9.
iii. Those measured as such in accordance with the election in
paragraph 33A of PAS 32; and
iv. Those mandatorily measured at fair value through profit or loss
in accordance with PFRS 9.
b) Financial assets measured at fair value through other
comprehensive income, showing separately:
i. Financial assets that are measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A of
PFRS 9. and
ii. Investments in equity instruments designated as such upon
initial recognition in accordance with paragraph 5.7.5 of PFRS 9.
c) Financial assets measured at amortized cost.
d) Financial liabilities at fair value through profit or loss,
showing separately:
i. Those designated as such upon initial recognition or
subsequently in accordance with paragraph 6.7.1 of PFRS 9.
ii. Those that meet the definition of held for trading in PFRS 9.
e) Financial liabilities measured at amortized cost.
 PAS 1 doest not prescribe the order or format in which an
entity present items. PAS 1 simply provided a list of items
that are sufficiently different in nature or function to
warrant separate presentation in the statement of financial
position. In addition:
A. Line items are included when the size, nature or function of an
item or aggregation of similar items is such that separate
presentation is relevant to an understanding of the entity’s
financial position; and
B. The descriptions used and the ordering of items or aggregation of
similar items may be amended according to the nature of the
entity and its transaction, to provide information that is relevant
to an understanding of the entity’s financial position.
 Asset is defined as a present economic resource
controlled by the entity as a result of past events.
 Economic Resource – is a right that has the potential to
produce benefits.
 The essential characteristics of assets are:
1. It is controlled by the entity
2. It is the result of past event
3. It has the potential to produce economic benefits.
Current Assets – are assets that are: Current Liabilities – are liabilities
a. Expected to be realized, sold or that are:
consumed in the entity’s normal a. Expected to be settled in the
entity’s normal operating cycle.
operating cycle.
b. Held primarily for trading.
b. Held primarily for trading c. Due to be settled within 12
c. Expected to be realized within 12 months after the reporting
months after the reporting period; or period; or
d. Cash or cash equivalent, unless d. The entity does not have an
restricted from being exchanged or unconditional right to defer
settlement of the liability for at
used to settle a liability for at least
least twelve months after the
twelve months after the reporting reporting period.
period.
 Includes cash on hand, petty cash fund, cash and in bank and
any cash equivalent.
 Cash Equivalents are 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 in value.
 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.
 Examples:
 Three month BSP Treasury Bill
 Three Year BSP treasury bill purchased three months before the date of
maturity.
 Three month time deposit
 Three month money market instrument
 Appendix A of PFRS 9 provided 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 of a designated and an effective hedging
instrument.
 Current Assets are usually listed in the Statement of
Financial Position in the order of liquidity.
 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
 PAS 1, Paragraph 66, 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 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, rental
to others or for administration purposes, and are expected
to be used during more than one period.
Examples:
a) Land g) Motor Vehicle
b) Land Improvement h) Furniture and Fixtures
c) Building i) Office Equipment
d) Machinery j) Patterns, molds and dies
e) Ship k) Tools
f) Aircraft l) Bearer plant
 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.
 An investment or long-term investment is an investment other
than a current investment or investment intended to be held for
more than one year.
 Examples:
a) Investments in shares and bonds
b) Investments in subsidiaries
c) Investments in associates
d) Investments in funds 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
 PAS 38, paragraph 8, defines intangible asset as an
identifiable non monetary asset without physical
substance.
 It must be controlled by the entity as a result of part
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:
◦ When it is separable or capable of being sold, transferred,
licensed, rented or exchanged separate from the entity.
◦ When it arises from contractual or other legal right
 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:

◦ The entity has a present obligation; The entity liable must be
identifiable.
◦ The obligation is to transfer an economic resour
◦ The liability arises from past events.
 Examples:
 Trade Payables and accruals for employees and other operatig
costs.
 Obligations that are not settled as part of the normal
operating cycle but are due for settlement within twelve
month after the end of the reporting period.
 Financial liabilities held for trading are financial liabilities
incurred with an intention to repurchased them in the near
term.
 PAS 1, paragraph 54, provides that as a minimum, line
items for current liabilities shall include:
◦ Trade and other payables
◦ Current provisions
◦ Short term borrowings
◦ Current portion of long term debt
◦ Current tax liability
 PAS 1, paragraph 69, states that all liabilities not
classified as current liabilities are classified as
noncurrent liabilities.
 Examples:
◦ Noncurrent portion of long-term debt
◦ Lease liability
◦ Deferred tax liability
◦ Long term obligations to entity officers
◦ Long term deferred revenue
 Estimated Liabilities are obligations which exist at the end
of the reporting period although the amount is not
definite.
 In common cases the date when it is due is also not
definite.
 Estimated liability may be classified either current or
noncurrent.
 Examples:
 Estimated liability for premium
 Estimated liability for warranties
 Estimated liability under customer loyalty program
 A contingent liability is a possible obligations that
arises from past events and whose existence will be
confirmed only by the occurrence or non-occurent 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:
◦ It is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation.
◦ The amount of the obligation cannot be measured reliably.
 Probable – the future event is likely to occur.
◦ As a rule of thumb, probable means more than 50% likely.

 Possible – the future event is less likely to occur

◦ The occurrence is 50% or less.

 Remote – The future is event is least likely to occur or

the chance of the future event is very slight
 The entity’s liquidity is of primary concern to most
statement users and this can be properly evaluated
through the current and non current classifications.

 Working Capital is the excess of current assets over

current liabilities and the working capital ration is
current assets divided by current liabilities.
 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 entity’s normal operating cycle is not clearly
identifiable, it is assumed to be twelve months.
 Equity – is the residual interest in the assets of the
entity after deducting all liabilities.
 Equity is increased by profitable operations and
contributions by owners.
 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 in a corporation
 It is the residual interest of owners in the net assets of a
corporation measured by the excess of assets over
liabilities.
 Elements constituting shareholders’ equity:
 Events after reporting period are those events, favorable
and unfavorable, that occur between the end of the
reporting period and the date when the financial
statements are authorized for issue.
 Events after the Reporting Period provides guidance as to
which events should lead to adjustments in the financial
statements and which events shall be disclosed in the notes
to financial statements.

 Two types of events can be identified:

1. Those that provide evidence and conditions that existed at the end
of the reporting period (adjusting events after the reporting
period); and
2. Those that are indicative of conditions that arose after the
reporting period (non-adjusting events after the reporting period)
 If any events occur after the end of the reporting period that provide
further evidence of conditions that existed at the end of reporting
period (i.e. Adjusting Events), then the financial statements must be
adjusted accordingly.
 Examples of Adjusting Events include:
◦ Settlement of litigation against the entity after the reporting date, in respect of
events that occurred before the end of reporting period, may provide evidence
of the existence and amount of liability at the reporting date. A liability in
respect of the litigation may be recorded in the financial statements if not
recognized initially or the amount of liability may be .
◦ Declaration of bankruptcy by a long outstanding receivable after the reporting
date may provide evidence that the receivable was impaired at the reporting
date. Impairment may be recognized in the financial statements by reducing
the amount of receivable to its recoverable amount, if any.
◦ Detection of fraud or errors after the reporting period may indicate that the
financial statements are misstated. Financial statements may be adjusted to
reflect accounting for those errors or frauds that relate to the present or prior
reporting periods.
 Entity shall not adjust the financial statements in
respect of those events after the end of reporting
period that reflect conditions that arose after the end
of reporting period (i.e. Non-Adjusting Events).
 For each material category of non-adjusting event after
the reporting period, an entity shall disclose the
following:
1. The nature of the event; and
2. An estimate of its financial effect, or a statement that such
an estimate cannot be made.
 Examples of Non-Adjusting Events include:
◦ Declaration of dividends after the reporting date does not
indicate existence of liability to pay dividends at the reporting
date and shall not therefore trigger the recognition of liability
in financial statements.
◦ Destruction of assets of the entity by floods occurring after
the reporting period does not indicate that the assets of the
entity were impaired at the end of reporting period. Hence,
the financial statements should not be adjusted to account
for the impairment loss that arose after the end of reporting
period.
◦ Initiation of litigation against the company arising out of
events that occurred after the reporting period does not
indicate the existence of liability at the reporting date and
shall not therefore trigger the recognition of liability in the
financial statements.
 A long-term obligation that is maturing within 12 months,
after the reporting period is classified as current, even if a
refinancing agreement to reschedule payments on a long-
term basis is completed after the reporting period but
before the financial statements are authorized for issue.
 The Obligation is classified as noncurrent, if the entity
expects and has the discretion to refinance it on a long-
term basis under an existing loan facility.
 If the refinancing is not at the discretion of the entity, the
financial liability is current.
 Refinancing refers to the replacement of an existing debt
with a new one but with a different terms, e.g. extended
maturity date.
 A refinancing where the debtor is under financial distress is
called “troubled debt restructuring”.
 Loan facility refers to a credit line.
 Illustrative case no. 1.
◦ Entity ABC’s current reporting date is December 31, 2020. A
bank loan taken 10 years ago is maturing on October 31, 2021.
◦ Analysis:
 A currently maturing obligation (i.e. due within 1 2months after the
reporting date) is classified as current even if the obligation used to
be noncurrent.
 Illustrative case no 2.
◦ On Jan. 15, 2021, Entity ABC enters into a refinancing
agreement to extend the maturity date of the above loan to
October 31, 2025. ABC’s financial statements are authorized
for issue on March 31, 2021.
◦ Analysis
 As a general rule, a currently maturing obligation is classified a
current if a refinancing agreement on a long term basis is
completed after the reporting period and the financial statements
are authorize for issue.
 Illustrative Case No. 3
◦ Under the original terms of the loan agreement, Entity ABC
has the unilateral right to defer (postpone) the payment of
the loan up to a maximum period of 5 years from the original
maturity date. The entity expects to exercise this right after
the reporting date but before the financial statements are
authorized for issue.
◦ Analysis:
 The entity has the discretion to refinance the obligation on a long-
term basis under an existing loan facility. Accordingly the loan is
classified as Non-current.
1. Calculation of Current Assets
◦ The ledger of ABC Co. as at Dec. 31, 2020 includes the
following:
ASSETS:
Cash 5,000
Trade Accounts Receivable (net of 5,000 credit balance in accounts) 20,000
Held for trading securities 40,000
Financial Assets designated at FVPL 15,000
Investment in Securities at FVOCI 35,000
Investment in bonds measured at amortized cost (due in 3 years) 30,000
Prepaid Assets 5,000
Deferred Tax Asset (Expected to be reversed in 2021) 6,000
Investment in Associate 18,000
Investment in Property 23,000
Sinking Fund 19,000
Property, Plant and Equipment (net) 50,000
Goodwill 14,000
Total Assets 280,000

Required: Compute the total Current Assets

 Solution:
Current Assets

Cash 5,000
Trade Accounts Receivable (20,000 + 5,000) 25,000
Held for trading securities 40,000
Financial Assets designated at FVPL 15,000
Prepaid Assets 5,000
Total Current Assets 90,000
2. Calculation of Current Liabilities
◦ The ledger of ABC Co. as of December 31, 2020 includes
the following:
LIABILITIES:
Bank overdraft 5,000
Trade accounts payable (net of P5,000 debit balance in accounts) 20,000
Notes Payable ( due in 20 semi-annual payments of P2,000) 40,000
Interest Payable 15,000
Bonds Payable (due on March 31, 2021) 35,000
Discounts on Bonds Payable (15,000)
Dividends Payable 5,000
Share Dividends Payable 6,000
Deferred Tax Liability (expected to be reversed on 2021) 18,000
Income Tax Payable 22,000
Contingent Liability 50,000
Reserve for contingencies 14,000
Total Liabilities 215,000

◦ Requirement: Compute for the total current liabilities

 Solution:

Current Liabilities
Bank overdraft 5,000
Trade accounts payable (20,000 + 5,000) 25,000
Notes Payable ( 2 installments x P2,000) 4,000
Interest Payable 15,000
Bonds Payable (due on March 31, 2021) 35,000
Discounts on Bonds Payable (15,000)
Dividends Payable 5,000
Income Tax Payable 22,000
Total Liabilities 96,000
3. Computation of Working Capital
◦ The ledger of ABC Co. as at Dec. 31, 2020 includes the
following:
ASSETS
Petty Cash Fund 7,000
Cash in Bank - BDO 15,000
Cash in Bank - BPI 5,000
Accounts Receivable(including P15,000 pledged accounts) 35,000
Accounts Receivable - assigned 25,000
Equity in assigned receivable 10,000
Notes Receivable (including P20,000 notes receivable discounted) 45,000
Notes Receivable discounted 20,000
Advances to Subsidiary 32,000
Held for Trading Securities 20,000
Inventory 62,000
Deferred Charges 18,000
Cash Surrender Value 6,000
Bond Sinking Fund 100,000
Total Assets 400,000
 LIABILITIES
Accounts Payable 40,000
Estimated Warranty Liability 14,000
Loans Payable related to assigned receivable (due in 12 mos) 15,000
Accrued Expenses 13,000
Bonds Payable (due on Dec. 31, 2021) 100,000
Premium on Bonds Payable 8,000
Total Liabilities 190,000

 Additional Information:
Petty Cash fund includes IOUs from employees amounting to ₱2,000.
The remaining balance of ₱5,000 represents bills and coins.
Cash in Bank –BDO represents the balance per bank statement. As of
Dec. 31, 2020, deposits in the amount of ₱10,000 was in transit while
outstanding checks amounted to ₱3,000. Included in the bank
statement as of Dec. 31, 2020 is an NSF check amounting to ₱8,000.
Cash in Bank-BPI represents the balance per ledger as of Dec. 31, 2020,
deposits in transit amounted ₱2,000 while outstanding checks
amounted to ₱1,000.
 Accounts receivable (unassigned) includes uncollectible past due
accounts of ₱4,000 which needs to be written off.
Also included in accounts receivable (unassigned) is a ₱5,000
receivable from a customer which was given a special credit term.
Under the special credit term, the customer shall pay the ₱5,000
receivable in equal quarterly installments of ₱625. The Last
payment is due on Dec. 31, 2022.
The held for trading securities include the reacquisition cost of ABC
Co.’s shares amounting to ₱4,000.
Inventory includes ₱30,000 goods in transit purchased FOB
Destination but excludes ₱12,000 goods in transit purchased FOB
shipping point.
 Required: Compute for the working capital.
 Solution:
Current Assets
Petty Cash Fund (P7,000 -P2,000 IOUs) 5,000
Cash in Bank-BDO (P15,000+10,000 DIT - 3,000 OC) 22,000
Cash In Bank - BPI 5,000
Advances to Employees 2,000
Accounts Receivable- unassigned 28,500
Accounts Receivable- assigned 25,000
Notes Receivable 45,000
Notes Receivable discounted (20,000)
Held for trading securities (net of P4,000 Treasury Shares) 16,000
Inventory (62,000 - 30,000 + 12,000) 44,000
Bond Sinking Fund 100,000
Total Current Assets 272,500

Current Liabilities
Accounts Payable (40,000-30,000+12,000) 22,000
Estimated Warranty Liability 14,000
Loans Payable related to assigned receivable (due in 12 mos) 15,000
Accrued Expenses 13,000
Bonds Payable (due on Dec. 31, 2021) 100,000
Premium on Bonds Payable 8,000
Total Current Liabilities 172,000

Working Capital 100,500

1. Teresa Co’s Dec. 31, 2020, balance sheet reported the following
current assets:
Cash 70,000
Accounts Receivable 120,000
Inventories 60,000
Total 250,000

An analysis of the accounts disclosed that account receivable

consisted of the following.
Trade accounts 96,000
Allowance for uncollectible accounts (2,000)
Selling price of unsold goods out on consignment at 130% of cost
not included in Teresa's ending inventory 26,000
Total 120,000

As at Dec. 31, the total Current Assets of Teresa should

be_________
2. Melvin Co’s trial balance included the following account
balances at Dec. 31, 2020:

Accounts Payable 15,000

Bonds Payable, due in 2021 25,000
Discount on Bonds Payable, due in 2021 3,000
Dividends Payable, due on Jan. 31, 2021 8,000
Notes Payable, due in 2022 20,000
Total 71,000

• What amount should be included in the current liability

section of Melvin’s Dec. 31, 2020 balance sheet?
3. The adjusted trial balance of Bayanihan Company as of December
31, 2021 is shown below:
Debit Credit
Cash on Hand 62,350
Cash in Bank - BPI (Savings) 1,720,500
Cash in Bank - BPI (Current) 1,890,234
Cash in Bank - BDO (Current) 567,891
Accounts Receivable 8,341,689

Allowance for Doubtful Accounts 347,182

Advances to employees 57,610
Loans Receivable (due in 2024) 9,827,341

Unearned Interest Income 1,234,819

Raw Materials Inventory 1,237,398
Work in Process Inventory 7,987,908
Finished Goods Inventory 12,892,309
Prepaid Income Tax 234,125
Prepaid Supplies 890,239
Advances to Suppliers 34,981
Held for Trading Securities 2,834,079
Investment in Equity Securities - FVOCI 987,234
Investment n Associate 1,290,347
Interest Receivable (due on March 2, 2022) 946,013
Land 8,980,751
Building 3,419,877
Accumulated Depreciation- Building 712,930
Equipment 917,387
Accumulated Depreciation- Equipment 234,125
Accounts Payable 9,071,239
Accrued Liabilities 889,712
Income Tax Payable 721,346
Deferred Tax Asset 1,092,387
Deferred Tax Liability 918,732
Loans Payable (due in 2022) 8,000,000
Discount on Loans Payable 746,252
Interest Payable (due on July 1, 2022) 341,782
Deferred Credits 712,788
Provision for Warranty Obligations 432,187
Ordinary Share Capital 20,000,000
Share Premium 6,000,000
Retained Earnings - Unrestricted 15,144,664
Retained Earnings - Appropriated 1,200,000
Revaluation Surplus 873,984
Unrealized Gains on Equity Securities - FVOCI 123,412
Totals 66,958,902 66,958,902
 Requirements:
1. Prepare the Statement of Financial Position of Bayanihan
Company.
2. Prepare notes showing the breakdown of the line items in
the financial statement. Make proper cross-referencing of
those notes. You may use “Note 2” as your first cross
reference