CHAPTER 2 In layman's language and in short, assets are properties owned.

STATEMENT OF FINANCIAL POSITION

The essential characteristics of an asset are:
TECHNICAL KNOWLEDGE a. The asset is controlled by the entity.
To know the nature of a statement of financial position. b. The asset is the result of a past event.
To understand the current and noncurrent classifications c. The asset has the potential to produce economic benefits.
of assets and liabilities.
To understand refinancing of a currently maturing debt. Current assets
To identify the components of equity in a corporation. PAS 1, paragraph 66, provides that an entity shall classify an
To identify the minimum line items in a statement of asset as current when:
financial position. a. The asset is cash or a cash equivalent unless the asset is
To be able to prepare a statement of financial position using restricted to settle a liability for more than twelve months after
Philippine format and IFRS format. the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
STATEMENT OF FINANCIAL POSITION c. The entity expects to realize the asset within twelve months
A statement of financial position is a formal statement showing after the reporting period.
the three elements comprising financial position, namely assets, d. The entity expects to realize the asset or intends to sell or
liabilities and equity. consume it within the entity's normal operating cycle.
Investors, creditors and other statement users analyze the
statement of financial position to evaluate such factors as Cash and cash equivalents
liquidity, solvency and the need of the entity for additional This category includes cash on hand, petty cash fund, cash in
financing. bank and any cash equivalent.

Liquidity is the ability of the entity to meet currently maturing However, the cash and cash equivalent shall be unrestricted in
obligations. use, meaning available anytime for the payment of current
obligations.
Solvency is the availability of cash over the longer term to meet
maturing obligations. PAS 7, paragraph 6, defines cash equivalents as short-term,
highly liquid investments that are readily convertible into
Information about liquidity and solvency is useful in predicting known amount of cash and which are subject to an insignificant
the ability of the entity to comply with future financial risk of changes in value.
commitments and to pay dividends to shareholders.
For an investment to qualify as a cash equivalent, it must be
Current and noncurrent distinction readily convertible into a known amount of cash and be subject
PAS 1, paragraph 60, provides that an entity shall present to an insignificant risk of changes in value.
current and noncurrent assets, and current and noncurrent Therefore, an investment normally qualifies as a cash
liabilities, as separate classifications in the statement of equivalent only when it has a short maturity of three months or
financial position. less from the date of acquisition.
When an entity supplies goods or services within a clearly
identifiable operating cycle the separate classification of current Examples of cash equivalents
and noncurrent assets and liabilities is a useful information. a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before
It highlights assets that are expected to be realized within the date of maturity
current operating cycle, and liabilities that are due for c. Three-month time deposit
settlement within the same period. d. Three-month money market instrument

For some entities, such as financial institutions, a presentation Note that what is important is the date of purchase which should
of assets and liabilities in increasing or decreasing liquidity be three months or less before maturity.
provides information that is faithfully represented and more
relevant. Thus, a BSP treasury bill that was purchased three years ago
cannot qualify as cash equivalent even if the remaining maturity
Assets is three months or less.
The Revised Conceptual Framework defines an asset as a Equity securities cannot qualify as cash equivalent because
present economic resource controlled by the entity as a result of shares do not have a date of maturity.
past events.
However, preference shares with specified redemption date and
An economic resource is a right that has the potential to produce acquired three months before redemption date can qualify as
economic benefits. cash equivalents.
Held for trading The normal operating cycle is significant as it is the basis of
Appendix A of PFRS 9 provides that a financial asset is determining the proper classification of assets into either
classified as held for trading when: current or noncurrent.

a. It is acquired principally for the purpose of selling it in the Presentation of current assets
near term. Current assets are usually listed in the statement of financial
b. On initial recognition, it is part of a portfolio of identified position in the order of liquidity.
financial instruments that are managed together and for which
there is evidence of a recent actual pattern of short-term profit PAS 1, paragraph 54, provides that as a minimum the line items
taking. under current assets are:
c. It is a derivative, except for a derivative that is a financial
guarantee contract or a designated and an effective hedging a. Cash and cash equivalents
instrument. b. Financial assets at fair value through profit or loss, such as
trading securities and other investments in quoted equity
Simply stated, financial assets held for trading or "trading instruments
securities" are debt and equity securities that are purchased with c. Trade and other receivables
the intent of selling them in the "near term" or very soon in order d. Inventories
to generate short-term gains or profits. e. Prepaid expenses

Expected to be realized within twelve months Noncurrent assets

This category refers to short-term nontrade receivables. The caption noncurrent assets is a residual definition.

Nontrade receivables represent claims arising from sources PAS 1, paragraph 66, simply states that " an entity shall classify
other than the sale of merchandise or services in the ordinary all other assets not classified as current as noncurrent assets".
course of business.
In other words, what is not included in the definition of current
Nontrade receivables are classified as current assets if assets is deemed excluded. All others are classified as
collectible within one year from the end of reporting period, the noncurrent assets. Accordingly, noncurrent assets include the
length of the operating cycle notwithstanding. following:

Otherwise, the nontrade receivables are classified as noncurrent a. Property, plant and equipment
assets. b. Long-term investments
с. Intangible assets
Realized, sold or consumed d. Other noncurrent assets
This current asset category refers to trade receivables,
inventories and prepayments. PAS 1, paragraph 56, provides that deferred tax asset is
classified as noncurrent asset.
These assets are classified as current assets because they are
expected to be realized, sold or consumed within the normal Property, plant and equipment
operating cycle or one year, whichever is longer. PAS 16, paragraph 6, defines property, plant and equipment as
tangible assets which are held by an entity for use in production
Operating cycle or supply of goods and services, for rental to others, or for
The operating cycle of an entity is the time between the administrative purposes, and are expected to be used during
acquisition of assets for processing and their realization in cash more than one period.
or cash equivalents.
The major characteristics of the definition of property, plant and
When the normal operating cycle is not clearly identifiable, the equipment are:
duration is assumed to be twelve months.
a. The property, plant and equipment are tangible assets,
The operating cycle of a trading entity is the average period of meaning with physical substance.
time that it takes to acquire the merchandise inventory, sell the
inventory to customers and ultimately collect cash from the b. The property, plant and equipment are used in business,
sale. meaning used in production or supply of goods and services, for
rental purposes and for administrative purposes.
The operating cycle of a manufacturing entity is defined as the Assets that are held for sale, including land, or held for
period of time between acquisition of materials entering into a investment are not included in property, plant and equipment.
process and their realization in cash or an instrument that is
readily convertible into cash. c. The property, plant and equipment are expected to be used
over a period of more than one year.
Examples of property, plant and equipment Other noncurrent assets
a. Land g. Motor vehicle Other noncurrent assets are those assets that do not fit into the
b. Land improvement h. Furniture and fixtures definition of the previously mentioned noncurrent assets.
c. Building i. Office equipment
d. Machinery j. Patterns, molds and dies Examples of other noncurrent assets include long-term
e. Ship k. Tools advances to officers, directors, shareholders and employees, or
f. Aircraft 1. Bearer plants abandoned property and long-term refundable deposit.

The old term for property, plant and equipment is fixed assets. Liabilities
Under the Revised Conceptual Framework, a liability is defined
Long-term investments as a present obligation of an entity to transfer an economic
The International Accounting Standards Committee defines resource as a result of past events.
investment as an asset held by an entity for the accretion of
wealth through capital distribution, such as interest, royalties, The essential characteristics of a liability are:
dividends and rentals, for capital appreciation or for other
a. The entity has a present obligation.
benefits to the investing entity such as those obtained through
The entity liable must be identified.
trading relationship.
It is not necessary that the payee or the entity to whom the
A current investment is an investment that is by nature readily obligation is owed be identified.
realizable and is intended to be held for not more than one year.
b. The obligation is to transfer an economic resource.
A noncurrent or long-term investment is an investment other This is the very heart of the definition of a liability.
than a current investment or investment intended to be held for Specifically, the obligation must be to pay cash, transfer
more than one year. noncash asset or provide service at some future time.

c. The liability arises from past event.

Examples of long-term investments
This means that the liability is not recognized until it is incurred.
a. Investments in shares and bonds
b. Investments in subsidiaries.
Current liabilities
c. Investments in associates
PAS 1, paragraph 69, provides that an entity shall classify a
d. Investments in funds such as sinking fund, plant expansion
liability as current when:
fund and preference share redemption fund
e. Investment property a. The entity expects to settle the liability within the entity's
f. Cash surrender value of life insurance policy normal operating cycle.
g. Investment in joint venture b. The entity holds the liability primarily for the purpose of
trading.
Intangible assets c. The liability is due to be settled within twelve months* after
PAS 38, paragraph 8, simply defines an intangible asset as an the reporting period.
identifiable nonmonetary asset without physical substance. d. The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
Paragraph 8 further states that "the intangible asset must be
reporting period.
controlled by the entity as a result of past event and from which
future economic benefits are expected to flow to the entity".
Examples of current liabilities
Intangible assets do not have physical substance but are a. Trade payables and accruals for employee and other operating
expected to provide future economic benefits to the entity. costs are part of the working capital used in the entity's normal
operating cycle.
The essence of intangible assets is the future economic benefits Such operating items are classified as current liabilities even if
that will flow to the entity. they are settled more than twelve months after the end of
reporting period.
PAS 38, paragraph 12, provides that an intangible asset is
identifiable: b. Obligations that are not settled as part of the normal operating
cycle but are due for settlement within twelve months after the
a. When it is separable or capable of being sold, transferred,
end of reporting period.
licensed, rented or exchanged separate from the entity.
Examples of such current obligations are bank overdraft,
b. When it arises from contractual or other legal right.
dividends payable, income taxes, other nontrade payable and
The common examples of identifiable intangible assets include current portion of noncurrent financial liabilities.
patent, franchise, copyright, trademark and computer software.
c. Financial liabilities held for trading are financial liabilities
An example of an unidentifiable intangible asset is goodwill. that are incurred with an intention to repurchase them in the near
term.
An example of a financial liability held for trading is a quoted Presentation of current liabilities
debt instrument that the issuer may buy back in the near term PAS 1, paragraph 54, provides that as a minimum, the face of
depending on changes in fair value. the statement of financial position shall include the following
line items for current liabilities:
Long-term debt currently maturing a. Trade and other payables
PAS 1, paragraph 72, provides that a liability which is due to be b. Current provisions
settled within twelve months after the end of reporting period is c. Short-term borrowing
classified as current, even if: d. Current portion of long-term debt
e. Current tax liability
a. The original term was for a period longer than twelve months.
b. An agreement to refinance or to reschedule payment on a The term "trade and other payables" is a line item for accounts
long-term basis is completed after the end of reporting period payable, notes payable, accrued interest on note payable,
and before the financial statements are authorized for issue. dividends payable and accrued expenses.

However, if the refinancing on a long-term basis is completed No objection can be raised if the trade accounts and notes
on or before the end of the reporting period, the refinancing payable are separately presented.
is an adjusting event and therefore the obligation is classified as
noncurrent. Noncurrent liabilities
The term noncurrent liabilities is a residual definition.
Discretion to refinance
PAS 1, paragraph 73, provides that if the entity has the PAS 1, paragraph 69, simply states that all liabilities not
discretion to refinance or roll over an obligation for at least classified as current liabilities are classified as noncurrent
twelve months after the reporting period under an existing loan liabilities.
facility, the obligation is classified as noncurrent even if it
would otherwise be due within a shorter period. Examples of noncurrent liabilities
a. Noncurrent portion of long-term debt
Note that the refinancing or rolling over must be at the b. Lease liability
discretion of the entity. c. Deferred tax liability
d. Long-term obligations to entity officers
Otherwise, if the refinancing or rolling over is not at the e. Long-term deferred revenue
discretion of the entity, the obligation is classified as a current
liability. PAS 1, paragraph 56, provides that deferred tax liability is
classified as noncurrent liability.
Covenants
Covenants are often attached to borrowing agreements which Working capital
represent undertakings by the borrower. The entity's liquidity is of primary concern to most statement
users and this can be properly evaluated through the current and
These covenants are actually restrictions on the borrower as to noncurrent classifications.
undertaking further borrowings, paying dividends, maintaining
specified level of working capital and so forth. For example, working capital is the excess of current assets over
current liabilities and the working capital ratio is current assets
Under these covenants, if certain conditions relating to the divided by current liabilities.
borrower's financial situation are breached, the liability
becomes payable on demand. Estimated liabilities
PAS 1, paragraph 74, states that such a liability is classified as Estimated liabilities are obligations which exist at the end of
current even if the lender thas agreed, after the end of reporting reporting period although the amount is not definite.
period and before the statements are authorized for issue, not to In many cases, the date when it is due or payable is not also
demand payment as a consequence of the breach. definite and in some instances, the exact payee cannot be
However, Paragraph 75 states that the liability is classified as identified or determined.
noncurrent if the lender has agreed on or before the end of Common examples of estimated liabilities include estimated
reporting period to provide a grace period ending at least twelve liability for premiums, estimated liability for warranties and
months after the end of reporting period. estimated liability under customer loyalty program.
In this context, the grace period is a period within which the Estimated liabilities may be classified either as current or
borrower can rectify the breach and during which the lender noncurrent.
cannot demand immediate payment.
Contingent liability Contingent assets usually arise from unplanned or other
PAS 37, paragraph 10, defines a contingent liability in two unexpected events that give rise to the possibility of an inflow
ways: of economic benefits to the entity.

A contingent liability is a possible obligation that arises from An example is a claim that an entity is pursuing through legal
past event and whose existence will be confirmed only by the processes when the outcome is uncertain.
occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the entity. Treatment of contingent asset
A contingent asset shall not be recognized because this may
A contingent liability is a present obligation that arises from result to recognition of income that may never be realized.
past event but is not recognized because:
However, when the realization of income is virtually certain, the
a. It is not probable that an outflow of resources embodying related asset is no longer contingent asset and its recognition is
economic benefits will be required to settle the obligation. appropriate.
b. The amount of the obligation cannot be measured reliably.
The outcome of a contingent asset is reported as follows:
Range of outcome a. A contingent asset is recognized in the period when realized.
The range of outcome of uncertainty relating to future event b. A contingent asset is only disclosed when it is probable.
may be described as: c. If the contingent asset is possible, no disclosure is required.
d. If the contingent asset is remote, no disclosure is required.
a. Probable
The future event is likely to occur. As a rule of thumb, probable Equity
means more than 50% likely. The term equity is the residual interest in the assets of the entity
b. Possible after deducting all of the liabilities.
The future event is less likely to occur. The occurrence is 50%
or less. Simply stated, equity means net assets or total assets minus
c. Remote liabilities.
The future event is least likely to occur or the chance of the
future event occurring is very slight. Equity is increased by profitable operations and contribution by
The occurrence is 10% or less. owners.

Conversely, equity is decreased by unprofitable operations and

Treatment of contingent liability distribution to owners.
A contingent liability is not recognized in the financial
statements. A contingent liability shall be disclosed only. The terms used in reporting the equity of an entity depending
on the form of the entity are:
The required disclosures are: a. Owner's equity in a proprietorship
a. Brief description of the nature of the contingent liability b. Partners' equity in a partnership
b. An estimate of the financial effects c. Shareholders equity in a corporation
c. An indication of the uncertainties that exist
d. Possibility of any reimbursement However, the term equity may simply be used for all business
entities.
If the contingent liability is remote, no disclosure is necessary.

If the present obligation is probable and the amount can be Shareholders' equity
measured reliably, the obligation is not a contingent liability but Shareholders' equity or stockholders' equity is the residual
shall be recognized as a provision. interest of owners in the net assets of a corporation measured
by the excess of assets over liabilities.
An expense and an estimated liability shall be recorded in
recognizing a provision. Generally, the elements constituting shareholders' equity with
their equivalent IAS term are:
Thus, a contingent liability is either probable or measurable but
not both. Philippine term IAS term
Capital stock Share capital
Contingent asset Subscribed capital stock Subscribed share capital
PAS 37, paragraph 10, defines contingent asset as a possible Common stock Ordinary share capital
asset that arises from past event and whose existence will be Preferred stock Preference share capital
confirmed only by the occurrence or nonoccurrence of one or Additional paid capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
more uncertain future events not wholly within the control of
Retained earnings Appropriation reserve
the entity.
appropriated
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
Share capital and share premium Reserves
Share capital is the portion of the paid in capital representing The term "reserves" is not officially defined in any accounting
the total par or stated value of the shares issued. standard or in the Conceptual Framework.

Subscribed share capital is the portion of the authorized share Under international accounting standard, the use of equity
capital that has been subscribed but not yet fully paid and reserves is based on whether a reserve is part of distributable
therefore still unissued. equity or nondistributable equity.

Subscriptions receivable shall preferably be reflected as a Distributable equity is that portion that can be distributed to
deduction from the related subscribed share capital. shareholders as dividends without impairing the legal capital of
the entity.
However, subscriptions receivable collectible within one year
shall be classified as current asset. Distributable equity squarely pertains to unappropriated
retained earnings.
Share premium is the capital contributed by the shareholders in
excess of the par or stated value of the shares subscribed and Nondistributable equity is that portion that cannot be
issued. distributed to the shareholders in any form during the lifetime
of the entity.
Retained earnings
Retained earnings represent the cumulative balance of periodic Generally, nondistributable equity reserves represent those
net income or loss, dividend distributions, prior period errors, items of equity other than the aggregate par or stated value of
changes in accounting policy and other capital adjustments. share capital and retained earnings unappropriated.

Unappropriated retained earnings represent that portion which Examples of reserves

is free and can be declared as dividends to the shareholders. a. Share premium reserve or additional paid in capital
b. Appropriation reserve or technically known as retained
Appropriated retained earnings represent that portion which is earnings appropriated
restricted and therefore not available for any dividend c. Asset revaluation reserve or revaluation surplus
declaration. d. Other comprehensive income reserve
A deficit is a debit balance in retained earnings. The deficit is
not presented as an asset but as deduction from shareholders' Line items - Statement of Financial Position
equity. PAS 1, paragraph 54, states that as a minimum, the statement of
financial position shall include the following line items:
Revaluation surplus 1. Cash and cash equivalente
Revaluation surplus is the excess of sound value over carrying 2. Financial assets (other than 1, 3 and 6)
amount of the revalued asset. 3. Trade and other receivables
Sound value is equal to the fair value or depreciated 4. Inventories
replacement cost. 5. Property, plant and equipment
6. Investment in associates using the equity method
Depreciated replacement cost is equal to replacement cost 7. Intangible assets
minus accumulated depreciation. 8. Investment property
9. Biological assets
Carrying amount is computed by deducting accumulated
10. Total of assets classified as held for sale and assets included
depreciation on cost from historical cost.
in disposal group classified as held for sale.
11. Trade and other payables
Treasury shares
12. Current tax asset and liability
Treasury shares are an entity's own shares that have been issued
13. Deferred tax asset and deferred tax liability
and then reacquired but not canceled.
14. Provisions
Treasury shares are usually recorded at cost and are not 15. Financial liabilities (other than 11 and 14)
recognized as an asset. 16. Liabilities included in disposal group held for sale 17.
Noncontrolling interest
The cost of treasury shares shall be reported as a deduction from 18. Share capital and reserves
the shareholders' equity.
The listing of the line items is not exclusive.
When treasury shares are acquired, the retained earnings must
Paragraph 54 simply provides a list of items that are sufficiently
be appropriated to the extent of the cost of the treasury shares.
different in nature and function to warrant separate presentation
on the face of the statement of financial position.
Paragraph 55 provides that additional line items, headings and
subtotals shall be presented on the face of the statement of
financial position when such presentation is relevant to the
understanding of the financial position of an entity.

The judgment on whether additional line items are presented

separately is based on the assessment of the following:
a. Nature and liquidity of assets
b. Function of assets within the entity
c. Amount, nature and timing of liabilities

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.

Actually, the statement of financial position is an expansion of

the accounting equation "asset equals liability plus equity".

PAS 1, paragraph 57, provides that the standard does not

prescribe the order or format in which line items are to be
presented.

Under Philippine jurisdiction, the common practice is to present

in the statement of financial position current assets before
noncurrent assets, current liabilities before noncurrent
liabilities, and equity after liabilities.

Other formats may be equally appropriate provided the

distinction is clear in accordance with paragraph 7 of the
Preface to IAS 1.

Note that the format of the statement of financial position as

illustrated in the appendix to IAS 1 is in the following order:
Noncurrent assets
Current assets
Equity
Noncurrent liabilities
Current liabilities

This may be the practice in other jurisdiction, like the United

Kingdom.