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349
ABC CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2
20X2
20X1
$'000
$'000
$'000
$'000
Assets
Non-current assets
Property, plant and equipment
X
X
Goodwill
X
X
Other intangible assets
X
X
X
X
Current assets
Inventories
X
X
Trade
receivables
X
X
Other
current
assets
X
X
Cash and cash equivalents
X
X
X
X
Total assets
X
X
Equity and liabilities
Equity
Share
capital
X
X
Retained
earnings
X
X
Other components of equity
X
X
X
X
Non-current liabilities
Long-term
borrowings
X
X
Long-term
provisions
X
X
X
X
Current liabilities
Trade and other payables
X
X
Short-term
borrowings
X
X
Current portion of long-term borrowings
X
X
Current tax payable
X
X
Short-term
provisions
X
X
X
X
Total equity and liabilities
X
X
2.1.1 Concepts
The statement of financial position makes use of the accounting equation concept that:
Assets = Capital + Liabilities
The statement of financial position is also prepared according to the business entity convention, that a
business is separate from its owners.
2.1.2 Assets
The assets are exactly the same as those we would expect to find in the accounts of a sole trader. The
only difference is that the detail is given in notes. Only the totals are shown on the face of the statement
of financial position.
2.1.3 Equity
We looked at share capital and reserves in detail in the previous chapter. Movements in equity must be
reported in the statement of changes in equity, which we will consider below.
Capital reserves usually have to be set up by law, whereas revenue reserves are appropriations of profit.
With a sole trader, profit was added to capital. However, in a limited company, share capital and profit
have to be disclosed separately, because profit is distributable as a dividend but share capital cannot be
distributed. Therefore any retained profits are kept in the retained earnings reserve.
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PART F: PREPARING BASIC FINANCIAL STATEMENTS
350
2.1.4 Liabilities
Liabilities are split between current and non-current. This is dealt with next.
2.2 The current/non-current distinction
Current assets and current liabilities of various types have been discussed in earlier parts of this
Interactive Text. Users of financial statements need to be able to identify current assets and current
liabilities in order to determine the company's financial position. Where current assets are greater than
current liabilities, the net excess is often called 'working capital' or 'net current assets'.
2.3 Alternative views of current assets and current liabilities
IAS 1 lays down rules for entities which choose to show the current/non-current distinction. It also states
what should happen if they do not do so.
Each entity should decide whether it wishes to present current/non-current assets and current/non-
current liabilities as separate classifications in the statement of financial position. This decision should
be based on the nature of the entity's operations. Where an entity does not choose to make this
classification, it should present assets and liabilities broadly in order of their liquidity.
In either case, the entity should disclose any portion of an asset or liability which is expected to be
recovered or settled after more than 12 months. For example, for an amount receivable which is due in
instalments over 18 months, the portion due after more than 12 months must be disclosed.
(IAS 1, paras. 60–61)
2.4 Current assets
An asset should be classified as a
current asset
when it is:
Expected to be realised in, or is held for sale or consumption in, the entity's normal operating
cycle
Held primarily for the purpose of being traded
Expected to be realised within 12 months after the reporting date
Cash or a cash equivalent which is not restricted in its use
All other assets should be classified as non-current assets.
(IAS 1, para. 66)
Non-current includes tangible, intangible operating and financial assets of a long-term nature. Other
terms with the same meaning can be used (eg 'fixed', 'long-term').
The term 'operating cycle' is defined by the standard as follows.
The
operating cycle
of an entity is the time between the acquisition of assets for processing and their
realisation in cash or cash equivalents.
(IAS 1, para. 68)
Current assets therefore include assets (such as inventories and trade receivables) that are sold or
realised as part of the normal operating cycle. This is the case even where they are not expected to be
realised within 12 months (IAS 1, para. 68).
2.5 Current liabilities
A liability should be classified as a
current liability
when it is:
Expected to be settled in the entity's normal operating cycle
Due to be settled within 12 months of the reporting date
Held primarily for the purpose of being traded
All other liabilities should be classified as non-current liabilities.
(IAS 1, para. 69)
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CHAPTER 20
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PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES
351
The categorisation of current liabilities is very similar to that of current assets. Thus, some current
liabilities are part of the working capital used in the normal operating cycle of the business (ie trade
payables and accruals for employee and other operating costs). Such items will be classed as current
liabilities even where they are due to be settled more than 12 months after the reporting date.
(IAS 1, para. 70)
There are also current liabilities which are not settled as part of the normal operating cycle, but which
are due to be settled within 12 months of the reporting date. These include bank overdrafts, income
taxes, other non-trade payables and the current portion of interest-bearing liabilities. Any interest-bearing
liabilities that are used to finance working capital on a long-term basis, and that are not due for
settlement within 12 months, should be classed as non-current liabilities.
(IAS 1, para. 71)
3
The statement of profit or loss and other comprehensive income
IAS 1 specifies what should be included in a statement of profit or loss and other comprehensive income
and includes a suggested format. Some items must be disclosed on the face of the statement.
3.1 Statement of profit or loss and other comprehensive income
So far in this Interactive Text, we have considered just the statement of profit or loss. However, IAS 1
requires entities to include a statement of profit or loss and other comprehensive income, either as a
single statement or as two separate statements: a statement of profit or loss and a statement of other
comprehensive income (IAS 1, para. 10A).
The statement of profit or loss and other comprehensive income takes the statement of profit or loss and
adjusts it for certain gains and losses. At FFA/FA level, this just means gains on revaluations of property,
plant and equipment. The idea is to present all gains and losses, both those recognised in profit or loss
(in the statement of profit or loss) as well as those recognised directly in equity, such as the revaluation
surplus (in other comprehensive income).
IAS 1 gives the following suggested format for a statement of profit or loss and other comprehensive
income.
EXAM FOCUS POINT
In their report on exams from 2017–18, ACCA's examining team provided the following comments on
producing financial statements of a single entity, which may help students to improve their
performance:
Carefully read through the information provided in the trial balance and decide what should be
included in your required statement.
Adjustments or calculations may be required to arrive at a figure for the financial statements.
Select the correct format and title for the statement of profit or loss or statement of financial
position in accordance with IAS 1.
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