Understanding the Most Acceptable Practices in Preparing a Statement of Financial Position

The structure and preparation of a statement of financial position, which is synonymous with a balance sheet, have undergone considerable evolution over the past few centuries. Different countries and organizations have had their preferences, but the landscape today is increasingly guided by standardized international reporting standards. This article aims to demystify the most acceptable practices in preparing a balance sheet by juxtaposing historical precedents with contemporary requirements.

The Historical Evolution of Balance Sheets

Centuries ago, the presentation of financial statements varied significantly from one country to another and organization to organization. Some balance sheets were systematically organized, while others were more fragmented and unstructured. As financial reporting became more globalized, the International Accounting Standard 1 (IAS 1): Presentation of Financial Statements provided a cohesive framework to streamline these inconsistencies.

CURRENT AND NON-CURRENT CLASSIFICATION

According to IAS 1, an entity must classify assets and liabilities as either current or non-current. This classification is determined based on whether they are expected to be realized within the entity's normal operating cycle or will be settled within a year. Let's break down the definitions and implications:

Current Assets

Expected to be realized in the entity's normal operating cycle Held primarily for trading purposes Expected to be realized within 12 months after the reporting period Unless restricted, included as cash and cash equivalents

All other assets are categorized as non-current assets.

Current Liabilities

Expected to be settled within the entity's normal operating cycle Held for trading purposes Due to be settled within 12 months Do not have the right to defer settlement beyond 12 months at the end of the reporting period

Other liabilities fall under the non-current category.

LONG-TERM DEBT AND LIABILITIES

Special considerations apply to long-term debt and liabilities. For instance, a long-term debt can be reclassified as non-current even if it is due within 12 months if the entity has the discretion to refinance within that period. Similarly, a liability becomes current if it is payable on demand due to a breach of a loan agreement unless a grace period is provided beyond 12 months.

CLASSIFYING LINE ITEMS

The IAS 1 mandates specific line items to be included on the statement of financial position:

Property, plant, and equipment Investment property Intangible assets Financial assets (excluding certain categories) Investments accounted for using the equity method Biological assets Inventories Trade and other receivables Cash and cash equivalents Assets held for sale Trade and other payables Provisions Financial liabilities (excluding certain categories) Current tax liabilities and assets defined in IAS 12 Deferred tax liabilities and assets defined in IAS 12 Liabilities included in disposal groups Non-controlling interests presented within equity Issued capital and reserves attributable to owners of the parent

Additional headings and subtotals may be required to provide a more comprehensive and understandable presentation.

FORMAT AND PRESENTATION OF LINE ITEMS

While no specific format is prescribed by IAS 1, entities have flexibility in how they present these line items. Line items can be presented in various sequences, such as current then non-current or vice versa. The balance sheet may also be net asset-oriented, subtracting liabilities from assets.

SHARE CAPITAL AND RESERVES

Entities must disclose the following regarding issued share capital and reserves:

Numbers of shares authorized, issued, and fully paid, along with those issued but not fully paid Par value or if shares do not have a par value A reconciliation of the number of shares outstanding at the beginning and the end of the period Description of rights, preferences, and restrictions Treasury shares, including those held by subsidiaries and associates Shares reserved for issuance under options and contracts Details of each reserve within equity

Additional disclosures are required for entities without share capital and those that have reclassified puttable financial instruments.

CONCLUSION

The preparation of a statement of financial position is now governed by standardized guidelines, particularly those outlined in IAS 1. While there may be room for discretion in presentation, adherence to these standards ensures comparability and transparency in financial reporting. Understanding these guidelines is crucial for any organization aiming to meet internationally accepted financial reporting requirements.