Contents
- What is a balance sheet?
- Balance sheet formats
- Balance sheet line items
- Current vs non current distinction
- Sequencing and format
- Key disclosures in the statement of financial position
What is a balance sheet?
A balance sheet is a financial statement that reports an entity’s assets, liabilities, and owner’s equity at a particular date. Also referred to as a statement of financial position, it is a financial document used by business entities, investors, and financial analysts.
A balance sheet provides a snapshot of an entity’s financial status at a specific point in time, allowing stakeholders to understand the entity’s financial worth. It is most valuable when compared to previous periods, like the previous year or quarter.
It works in conjunction with other financial statements such as the cash flow statement and the income statement to evaluate an entity’s financial health, profitability, and overall performance.
Balance sheet formats
Balance sheets can take on different formats to cater to various reporting needs. There are three primary balance sheet formats:
Comparative Balance Sheets
Comparative balance sheets offer a direct comparison between the entire balance sheet of the current accounting period and the preceding one.
These side by side comparisons help stakeholders identify trends and changes in an entity’s financial position over time. It facilitates a clear understanding of how assets, liabilities, and equity have evolved from one period to another.
Vertical Balance Sheets
Vertical balance sheets are presented in a single column format, typically starting with assets, followed by liabilities, and shareholders’ equity.
This format is commonly used when there are relatively fewer line items to report. It provides a straightforward and concise view of an entity’s financial position, with all components listed in a single column.
Horizontal Balance Sheets
Horizontal balance sheets use multiple columns to provide more detailed information about a business’s assets, liabilities, and equity.
This format becomes particularly useful when an entity has numerous line items to report. It allows for a comprehensive breakdown of these items, making it easier for stakeholders to assess the specifics of the financial position.
Balance sheet line items
Australian Accounting Standards (AAS) outline specific requirements for the information presented in this statement. Note that small proprietary limited companies are not usually required to prepare General Purpose Financial Statements (GPFS) according to Australian Accounting Standards.
Cash and cash equivalents: This represents the cash on hand and highly liquid investments that can be quickly converted into cash.
Trade and other receivables: This category encompasses amounts owed to the entity by customers and other parties.
Financial assets (excluding specific items): This includes various financial investments such as stocks, bonds, and other financial instruments.
Inventories: These are goods or products held by the entity for sale or use in its operations.
Property, plant, and equipment: This category covers tangible assets like land, buildings, machinery, and vehicles that the entity uses in its operations.
Investment property: Refers to real estate or property held for rental income or capital appreciation.
Intangible assets: These are non physical assets like patents, trademarks, copyrights, and goodwill.
Biological assets: Assets related to living organisms, often seen in industries like agriculture.
Investments in associates: Investments in other entities where the entity has significant influence but doesn’t have full control.
Investments in joint ventures: Investments in collaborative ventures where the entity shares control with other parties.
Trade and other payables: Amounts the entity owes to its suppliers and other creditors.
Financial liabilities: These include various financial obligations such as loans and bonds.
Liabilities and assets for current tax: Amounts related to taxes payable or recoverable in the current period.
Deferred tax liabilities and deferred tax assets: These are tax related items that are expected to impact future tax expenses and benefits. They are always classified as non current.
Provisions: Liabilities that are contingent on future events, such as warranties or legal settlements.
Non controlling interests: Represents the portion of equity in subsidiaries not owned by the parent entity, presented separately from the equity attributable to the parent.
Equity attributable to the owners of the parent: This is the shareholders’ equity, reflecting the ownership interests in the entity.
The total of assets classified as held for sale and assets included in disposal groups classified as held for sale: Assets that are expected to be sold in the near future.
Liabilities included in disposal groups classified as held for sale: Liabilities related to the assets classified as held for sale.
Additionally, the accounting standards allow entities to present additional line items, headings, and subtotals in the statement of financial position when such presentation is relevant to understanding the entity’s financial position. This flexibility enables entities to provide a more detailed and informative picture of their financial standing.
Current vs non current distinction
One of the fundamental principles of AAS is the distinction between current and non current assets and liabilities in the balance sheet. The rationale behind this distinction is to provide stakeholders with a clearer understanding of an entity’s short term and long term financial obligations and resources.
However, there is an exception to this rule: if presenting assets and liabilities based on liquidity provides more relevant and reliable information, this approach can be used.
Current Assets
Assets are classified as current when they meet one or more of the following criteria:
- The entity expects to realise, sell, or use the asset within its normal operating cycle, typically within one year.
- The asset is primarily held for trading purposes.
- The entity anticipates realising the asset within twelve months after the reporting date.
- The asset is cash or a cash equivalent, unless it is restricted from being used to settle a liability for at least twelve months after the reporting date.
Non Current Assets
Assets that do not meet the criteria for current assets are classified as non current. These are typically resources that the entity does not expect to convert into cash or use up within the next twelve months.
Current Liabilities
Liabilities are classified as current when they meet one or more of the following criteria:
- The entity expects to settle the liability within its normal operating cycle.
- The liability is primarily held for trading purposes.
- The liability is due to be settled within twelve months after the reporting date.
- The entity does not have an unconditional right to defer the settlement of the liability for at least twelve months after the reporting date. It’s important to note that terms allowing the settlement through the issuance of equity instruments do not affect the classification.
Non Current Liabilities
Liabilities that do not meet the criteria for current liabilities are classified as non current. These are typically obligations that the entity does not expect to settle within the next twelve months.
Sequencing and format
The AAS provides flexibility when it comes to the sequencing and format of items in the balance sheet. While it lists specific items that should be presented separately when they significantly differ in nature or function, entities can adjust descriptions and sequencing based on their unique circumstances and transactions.
This allows for the presentation of information that is relevant to understanding the entity’s financial position.
Assessment for Additional Items
Decisions regarding whether to present additional items separately in the balance sheet are based on an assessment of various factors, including the amounts, nature, and liquidity of assets, the function of assets within the entity, and the amounts, nature, and timing of liabilities.
This assessment ensures that the balance sheet provides a comprehensive and accurate representation of the entity’s financial condition.
Key disclosures in the statement of financial position
To ensure transparency and facilitate informed decision making, the AAS prescribe essential disclosure requirements related to the classification and presentation of assets and liabilities.
Further Sub Classifications
The entities must provide further sub classifications of line items in the statement of financial position or accompanying notes. These subcategories should be tailored to the entity’s specific operations and are intended to offer a more detailed view of the financial position.
Here are some examples:
- Property, Plant, and Equipment: Entities are encouraged to classify these assets in a manner that aligns with their unique circumstances and needs.
- Trade and Other Receivables: It’s important to show separate amounts due from related parties, amounts due from other parties, and contract assets arising from contracts with customers.
- Inventories: Detailed categorisation of inventories into those intended for sale, those in the process of production for sale, and those in the form of materials or supplies for use in production or service provision.
- Trade and Other Payables: Breaking down payables to trade suppliers, related parties, contract liabilities from contracts with customers, and accruals.
- Provisions: Disclosing provisions for employee benefits and other provisions.
- Equity Classes: Presentation of equity classes, including paid in capital, share premium, retained earnings, and items of income and expense recognised in other comprehensive income, in accordance with Australian Accounting Standards.
Share Capital Disclosure
Entities with share capital are required to provide specific disclosures related to each class of share capital:
- The number of shares authorised and issued, including fully paid and issued but not fully paid.
- Par value per share or an indication that the shares have no par value.
- A reconciliation of the number of shares outstanding at the beginning and end of the period.
- Details regarding the rights, preferences, and restrictions associated with each class of share, including restrictions on dividends and capital repayment.
- Information about shares held by the entity, its subsidiaries, or associates.
- Data on shares reserved for issuance under options and contracts, including terms and amounts.
- A description of each reserve within equity.
Entities Without Share Capital
Entities without share capital, such as partnerships or trusts, are not exempt from disclosure requirements. They must provide information equivalent to what is required for share capital. This includes showing changes during the reporting period in each category of equity and explaining the rights, preferences, and restrictions associated with each category.
Assets Classified as Held for Sale
In cases where an entity has assets classified as held for sale or assets and liabilities included in a disposal group classified as held for sale at the reporting date, specific disclosures are mandated. These include:
- A description of the asset(s) or the group of assets and liabilities marked as held for sale.
- A description of the circumstances leading to the expected disposal, including the manner and timing of the disposal.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.