What are the items to be disclosed in the statement of financial position?
The purpose of the Statement of Financial Position/Balance Sheet (SFP/BS) is to report the assets of a company and the composition of the claims against those assets by creditors and investors at a specific point in time. Assets and liabilities come from several sources and are usually separated into current and non-current (IFRS) or long-term (ASPE) categories. Show
The statement of financial position (balance sheet under ASPE), reports a businesses assets, liabilities and shareholders’ equity at a specific date (at a point in time). This financial statement thus becomes a way for calculating rates of returns on invested assets and for evaluating a business’ capital structure. The statement of financial position is useful for analyzing a company’s liquidity, solvency and financial flexibility. Liquidity depends on the amount of time that is expected to pass until an asset is converted to cash or until a liability has to be paid. Solvency reflects an enterprises ability to pay its debt and associated interest. Liquidity and solvency therefore impact the financial flexibility of a company. Financial flexibility considers the ability of a company to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. 4.2.1. Disclosure RequirementsIFRS (IAS 1) and ASPE (section 1521) identify the disclosure requirements for SFP/BS, which are quite similar. Listed below are summary points for some of the more commonly required disclosures for both standards:
Below are the basic classifications for some of the more common reporting line items and accounts. The focus is mainly IFRS for simplicity, though ASPE is substantially similar. The required supplemental disclosures below focus on the measurement basis of the various assets, the due dates, interest rates, and security conditions for non-current liabilities; and the structure for each class of share capital in shareholders’ equity when preparing a SFP/BS. These will be discussed in more detail in the chapters that follow in the next intermediate accounting course. Let’s review some important concepts before looking at specific accounts: Asset is a resource with economic value that a company owns or controls with the expectation that it will provide a future benefit. Current assets are those assets that are converted into cash within the operating cycle or one year, whichever is longer. Monetary assets represent cash or claims to future cash flows that are fixed and determinable in amounts and timing. These assets are either money itself or claims to future cash flows that are fixed or determinable in amount and timing. Examples include accounts or notes receivable. Nonmonetary assets include assets where measurement is uncertain. Their value, in terms of a monetary units such as dollars, is not fixed. Examples include inventory, property plant and equipment and intangibles. Property, plant and equipment are tangible, capital assets. These assets last for a longer period, are durable in nature and are used in ongoing business operations to generate income. Intangible assets are capital (long-term) assets that have no physical substance. Liability is an enforceable economic burden or obligation. Current liabilities are those obligations due within one year from the reporting date or the operating cycle, whichever is longer. Monetary liabilities require future cash flows that are fixed or determinable in amount and timing. Examples include accounts and notes payable as well as long-term debt. (we know the amount of cash to pay). Long-term liabilities are obligations that are not reasonable expected to be liquidated (paid) within the normal operating cycle but instead are payable as some later date. In summary:
SFP/BS – Classifications and Reporting Requirements
Note that in addition to the measurement basis identified for each asset category in the chart above, many assets’ valuations can be subsequently adjusted, depending on the circumstances. Below are examples of some of the common valuation adjustments made to various asset accounts that will be discussed in later chapters.
Disclosures such as those listed in the classification schedule above may be presented in parentheses beside the line item within the body of the SFP/BS, if the disclosure is not lengthy. Otherwise, the disclosure is to be included in the notes to the financial statements and cross-referenced to the corresponding line item in the SFP/BS. Using parentheses tends to be more common for ASPE companies with simpler disclosure requirements. IFRS companies and larger ASPE companies extensively use the cross-referencing method because of the more complex and lengthy notes disclosures required. Below is an example of a Statement of Financial Position. Recall that a classified SFP/BS reports groupings of similar line items together as either current or non-current (long-term) assets and liabilities.
Note that the measurement basis disclosures are in parenthesis for any assets where a measurement other than cost is possible. Also note the interest rate and due date parenthetical disclosure for the long-term liability. In the equity section, the class, authorized, and outstanding shares are disclosed. Taking a closer look at this statement, ASPE Company reports $1,387,000 in total assets and $464,000 in corresponding obligations against those assets owing to suppliers and other creditors. On the topic of debt reporting, the current portion of long-term debt is a reported as a current liability. The current portion of the long-term debt is the amount of principal that will be paid within one year of the SFP/BS date. For example, on December 31, 2019, ASPE Company signed a three-year, 2%, note. Payments of $137,733 are payable each December 31. If the market rate was 2.75%, the present value of the note would be $391,473 at the time of signing on December 31, 2019. Below is the payments schedule of the note using the effective interest method. If the SFP/BS date is December 31, 2020, the current portion of the long-term debt to report as a current liability would be $130,459 from the note payable payments schedule above. Note that this amount comes from the year following the 2020 reporting year to correspond with the principal amount owing within one year of the current reporting date (December 31, 2020). The total amount owing as at December 31, 2020 is $264,506; therefore, the long-term portion of $134,047 would be the amount owing net of the current portion of $130,459. Below is how it would be reported in the SFP/BS at December 31, 2020: Current Liabilities Current portion of long-term note payable Long-term Liabilities Note payable, 2%, three-year, due date Dec 31, 2022 (balance owing Dec 31, 2020, of $264,506-$130,459) If the current portion of the long-term debt is not reported as a current liability, there will be a material reporting misstatement that would affect the assessment of the company’s liquidity and solvency. Total equity of $923,000 represents the remaining assets financed by the company shareholders. Ranking first are the preferred shareholders capital investors of $150,000. They are usually reported before the common shares because they are senior to common shares in terms of both dividend payouts and claims to resources if a company liquidates. However, this is not a reporting requirement. The contributed surplus of $15,000 is additional paid-in capital from shareholders. Examples of transactions that recognize contributed surplus include:
If there are more line items than simply common shares, a paid-in capital subtotal is also required for IFRS companies. Paid-in capital is the total amount “paid in” by shareholders and therefore not resulting from ongoing operations. It is comprised of all classes of share capital plus contributed surplus, if any. Finally, the retained earnings line item is the total net income accumulated by the company since its inception that has not been distributed in dividends to the shareholders. Below are other reporting requirements:
4.2.2. Factors Affecting the Statement of Financial Position/Balance Sheet (SFP/BS)Accounting Estimates, Changes in Accounting Policy, and Correction of ErrorsThese were discussed in the previous chapter, but a summary of the pertinent information in this chapter is warranted because of their impact on the SFP/BS. Financial statements can be affected by changes in accounting estimates, changes due to accounting errors or omissions, and changes in accounting policies. These were first introduced in the introductory accounting course and will also be discussed in detail in the next intermediate accounting course. However, it is worth including a review at this time because of the potentially significant effect on the financial statements. Changes in Accounting EstimatesAccounting is full of estimates that are based on the best information available at the time. As new information becomes available, estimates may need to be changed. Examples of changing estimates would be the useful life, residual value, or the depreciation pattern used to match the use of assets with revenues earned. Other changes in estimates involve uncollectible receivables, asset impairment losses, and pension assumptions that could affect the accrued pension asset/liability account in the SFP/BS. Changes in accounting estimates are applied prospectively, meaning they are applied to the current fiscal year if the accounting records have not yet been closed and for all future years going forward. Changes Due to Accounting Errors or OmissionsThe accounting treatment for an error or omission is a retrospective adjustment with restatement. Retrospective adjustment means that the company reports treat the error or omission as though it had always been corrected. If an accounting error in inventory originating in the current fiscal year is detected before the current year’s books are closed, the inventory error correction is easily recorded to the current fiscal year accounts. If the accounting records are already closed when the inventory error is discovered, the error is adjusted to the inventory account and to retained earnings, net of taxes. This results in a restatement of inventory and retained earnings in the current year. If the financial statements are comparative and include previous year’s data, this data is also restated to include the error correction from the previous year. Changes in Accounting PolicyThe accounting treatment for a change in accounting policy is retrospective adjustment with restatement. Examples of changes in accounting policies are:
Accounting policies must be applied consistently to promote comparability between financial statements for different accounting periods. A change in accounting policy is only allowed under the following two conditions:
Changes in accounting policies are applied retrospectivelyin the financial statements. As with accounting errors, retrospective application means that the company implements the change in accounting policy as though it had always been applied. Consequently, the company will adjust all comparative amounts presented in the financial statements affected by the change in accounting policy for each prior period presented. Retrospective application reduces the risk of changing policies to manage earnings aggressively because the restatement is made to all prior years as well as the current year. If this were not the case, the change made to a single year could materially affect the statement of income for the current fiscal year. A cumulative amount for the restatement is estimated and adjusted to the affected asset or liability in the SFP/BS and to the opening retained earnings balance of the current year, net of taxes, in the statement of changes in equity (IFRS) or the statement of retained earnings (ASPE). Contingencies, Provisions and GuaranteesIn accounting, a contingency (ASPE) or provision (IFRS) exists when a material future event, or circumstance, could occur but cannot be predicted with certainty. IFRS (IAS 37.10) has the following definitions regarding the various types of contingencies in accounting (IFRS, 2015). Provision:
Liability:
Contingent liability:
Contingent asset:
IAS 37 explains that a contingent liability is to be disclosed in the financial statement notes. Figure 4.1 is a decision tree that identifies the various decision points when determining if a potential obligation should be recognized and recorded, because it meets the definition of a liability; added only to the notes, because it meets the definition of a contingent liability; or omitted altogether because it fails to meet any of the relevant criteria (Friedrich, Friedrich, & Spector, 2009). Figure 4.1 Decision tree to determine if a potential obligation should be recognized and recorded (Friedrich et al., 2009)IAS 37 also states that a contingent asset is not to be recorded until it is actually realized but can be included in the notes if it is probable that an inflow of economic benefits will occur (IFRS, 2012). If a note disclosure is made, management must take care not to mislead the reader regarding its potential realization; if the potential asset is not probable, it must not be disclosed. ASPE is similar, but the provision is usually interpreted as “more likely than not” whereas a contingent liability is one that is “likely.” Contingencies will be discussed further in the chapter on liabilities in the next intermediate accounting course. A guarantee is a type of contingent liability because it is a promise to take responsibility for another company’s financial obligation if that company is unable to do so. An example might be a parent company that guarantees part or all of a bond issuance to investors by its subsidiary company. Guarantees are not recognized and recorded because they are not probable, so they are to be disclosed in the notes. This will enable investors and creditors to assess the potential impact of the guarantee and the risk associated with it. Subsequent EventsThere is a period of time after the year-end date when economic events apparent in the new year may need to be either reported in the financial statements for the year just ended or disclosed in the notes prior to their release. If this subsequent event is significant and relates to business operations prior to the reporting date, it is to be included in the financial statements prior to release. These would include adjusting entries such as inventory write-downs due to shrinkage, recording additional accounts payable for late arriving invoices from suppliers or correction of errors or omissions found when reconciling the general ledger accounts as part of the year-end process. If a subsequent event is significant but relates to operations occurring after the reporting period, it is to be included in the notes. An example might be where early in the new fiscal year, there is a flood causing serious damage to buildings and equipment, if the repair or replacement costs are significant and perhaps uninsured, these costs, though correctly paid and recorded in the new year, are to be disclosed in the notes to the financial statements for the year-end just ended. This will ensure that the company stakeholders will be aware of all the information about risks that could detrimentally affect company operations. What items are shown on the statement of financial position?A company's balance sheet, also known as a "statement of financial position," reveals the firm's assets, liabilities, and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements.
Which data should be disclosed in financial reports?Objective of financial statements. assets.. liabilities.. equity.. income and expenses, including gains and losses.. contributions by and distributions to owners (in their capacity as owners). cash flows.. What items are disclosed on a balance sheet?What Is Included in the Balance Sheet? The balance sheet includes information about a company's assets and liabilities. Depending on the company, this might include short-term assets, such as cash and accounts receivable, or long-term assets such as property, plant, and equipment (PP&E).
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