After reading this article you will learn about the format of balance sheet.
Balance sheet reflects financial position of an entity. IAS 1 has used the term Statement of Financial Position in place of Balance Sheet. IFRSs format focuses on classified balance sheet based on current non-current classification.
Balance sheet presents assets, liabilities and equity of an entity in a classified manner.
IFRSs based primary and secondary classifications are:
Break-up of non-current and current assets:
Property, Plant and Equipment:
Land, Building, Plant and machinery, Furniture, Equipment etc. Initially they are recognized at cost. Either cost or revaluation model can be followed in subsequent measurement. If the cost model is followed assets are periodically revalued. Revaluation model is followed if the fair value of the asset can be reliably measured. Depreciation is charged on these assets. They are also tested for impairment. Land is not depreciated.
Patent right, Copyright, Export Quota, etc. Internally generally intangibles are not recognized – examples are goodwill, brand, customer list. But they are recognized if separately purchased or purchased in a business combination. Likewise property, plant and equipment, intangible assets are also accounted for applying either cost or revaluation model. Intangibles having finite life is amortised over their useful life. Intangibles may have indefinite life in that case they are not amortised. Intangibles are tested for impairment.
Investments in shares, debentures or bonds, loans, receivables and advances, cash, bank balances etc.
They are classified into four categories:
(i) Held for Trading and Fair Value Through Profit or Loss,
(ii) Held to Maturity,
(iii) Loans and receivables and
(iv) Available for sale.
Stand-alone derivatives are classified as held for trading financial instruments – they may be treated as financial asset or financial liability depending upon their positive or negative value.
All these financial assets are initially recognized at fair value which is the purchase price. Expenses incurred to purchase these assets brokerage and taxes are normally included in the purchase price except in the case of held for trading category asset in which case expenses are charged to profit or loss.
In subsequent measurement, held for trading and available for sale financial assets are measured at fair value. The fair value gain or loss of held for trading asset is charged to profit or loss. The fair value gain or loss of available for sale asset is charged to equity and reflected in the statement of other comprehensive income. Loans and receivables, and held to maturity financial assets are accounted for applying amortised cost method.
There are three special types of investments – investments in subsidiary, interests in joint venture and investments in associates. In consolidated financial statements, investments in subsidiary is fully consolidated with full goodwill or partial goodwill. Interests in joint venture are consolidated applying proportionate consolidation method.
Alternatively, they are accounted for applying equity method accounting. Investments in associates are also accounted for applying equity method accounting. In separate financial statements, they are accounted for at cost or in accordance with the accounting for financial assets (in which case they are classified as available for sale).
Inventories are valued at lower of the cost or net realizable value.
Property held by the owner or lessee under finance lease for earning rental income and/or capital appreciation. Property under development in classified under property, plant and equipment. It is initially recognized at cost. In subsequent measurement, either cost model or revaluation model can be followed. In case revaluation model is followed, the fair value gain or loss is recognized in the profit or loss.
Non-current assets held for sale and discontinued operations:
Up to the point of classification as held for sale or disposal group, they are depreciated and impairment loss is charged to profit or loss.
After classification, they are measured at lower of the:
(i) Carrying amount and
(ii) Fair value less costs to sell.
Break up of equity and liabilities:
Equity and liabilities are distinguished and separated. Equity instrument is an contract that evidence residual interest in the assets of an entity after deducting all liabilities.
(i) Non-puttable equity shares,
(ii) Irredeemable preference shares,
(iii) Warrants and written call options that allow the holder to subscribe or purchase fixed quantity of non-puttable equity shares of the entity in exchange of cash or other financial assets.
Redeemable preference shares bear the characteristics of a liability – they carry fixed rate of return as well as repayment of principal amount. They are classified as a liability. If any equity instrument grants put option to the holder, then it becomes redeemable at the option of the holder. So normally such type of equity instruments are classified as a liability with certain exceptions.
Compound financial instruments like convertible bonds carry the feature of liability as well as equity. Accordingly, the liability component is valued first based on comparable indicators of similar plain vanilla debt instruments and the balance amount is treated as equity.
They are classified as non-current and current applying more than 12 months maturity criteria. Trade payables are classified as non- current if they are expected to be collected beyond the normal operating cycle or 12 months whichever is higher.
Any item of non-current liabilities (except trade payables) are classified as current liability if its maturity as on the reporting period end is less than 12 months. Any provision which are expected to mature after 12 months from the reporting period end is classified as non-current.
Trade payables, provision which are expected to mature within a period of 12 months from the reporting period end, held for trading liability, etc.
Provisions are measured applying the principles of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Trade payables are measured at amount payable. Derivatives which become held for trading financial liability are measured at fair value. Other loans, debentures/bonds and liabilities are measured at amortised cost.
Examples of preparation and presentation of balance sheet:
Land 100, Building 700, Plant and Machinery 7500, Investment Property 400, Financial Assets (accounted for at cost): Held for Trading – cost 290, fair value 200; Available for sale – cost 300, fair value 250, Profit after tax 2000, Retained earnings 5000, Equity share capital 1000 (there is 1:1 bonus issue which is not adjusted), trade payables 200, inventories – cost 200, net realizable value 250, receivables 200, 10% Redeemable preference shares 200 (dividend is not accounted for); Proposed dividend 200; Depreciation on property, plant and equipment (building 10, plant and machinery 750) is not yet adjusted against asset; Provisions – current 50, non-current 150, Cash and bank balances 70.
Prepare Balance Sheet after adjusting Profit after Tax.
Land 100, Building 600, Plant and Machinery 8500, Patent right 200, Investment Property 400, Financial Assets (accounted for at cost): Held for Trading – cost 100, fair value 250; Available for sale – cost 300, fair value 450, Profit after tax 3000, Retained earnings 6000, Equity share capital 1500 (there is 1:1 bonus issue which is not adjusted), trade payables 240, inventories – cost 300, net realizable value 280, receivables 300, 10% Redeemable preference shares 500 (dividend is not accounted for); Proposed dividend 200; Depreciation on property, plant and equipment (building 30, plant and machinery 850) is not yet adjusted against asset; Amortisation on patent is to be carried out over 5 years. Provisions – current 100, non-current 250, Cash and bank balances 2690.
Plant & machinery – fair value less costs to sell 6500, value in use 6800. Investment property – fair value 450 (the company follows fair value model).
Prepare Balance Sheet after adjusting Profit after Tax for amortisation, dividend, fair value gain/loss.
On the basis of the following Trial Balance prepare a Balance Sheet of Indian Chemicals Ltd. as on 31 March, 2009.
Balance sheet comparatives:
Let us now try to understand how to use balance sheet comparatives. Last year’s balances of liabilities and assets help to understand the direction of change in financial position of the company. Given below is an illustration using which let us try to interpret the balance sheet comparatives.
Given below is balance sheet of Ahuja Brothers Ltd. as at 31 – 3 – 2009 along with comparatives.
Using the comparatives interpret the balance sheet information:
(i) Do you think the balance sheet is sinking?
(ii) Is the company maintaining balance between shareholders’ funds and loan funds?
(iii) Is the company maintaining balance between fixed asset and current asset?
(iv) Is the company maintaining balance between current assets and current liabilities?
(v) How would the balance of Miscellaneous Expenditure get reduced?
(vi) From which source the company has financed new purchase of fixed assets?
(i) The size of balance sheet has reduced by Rs.10 million which implies only 0.5% sinking of the assets. Although this is not a major downward shift.
(ii) No. Dependence on shareholders’ funds increasing.
(iii) No. There is a decrease fixed assets per rupee of current assets. This happens when fixed asset is depreciating. New purchase could not maintain the balance. Alternatively, there may be increased investment in current assets signifying change in working capital policy of the company.
(iv) No. Current asset per rupee of current liability is increasing. There is proportionately more investments in current assets. There is a need to look into the balance sheet schedule to check if there is increase in inventories or debtors.
(v) Generally, amount spent for miscellaneous expenditure is amortized over a period.
(vi) It can be stated that the company has utilized the current profit for repayment debt, and sold investments for purchase of new fixed assets and investment in current assets. But the order of cash flow cannot accurately analyzed from the balance sheet. Also it is possible that the sale proceeds of investments were utilized for repayment of debt and balance was invested in the purchase of fixed assets and partly for financing current assets. The current profit has been entirely locked in current assets.
Study the change column in the table given below: