FINANCIAL ACCOUNTING & REPORTING 3

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Statement of financial position

Module 009 Week003- FinAcct3 Statement of

financial position
Companies often are involved in situations where uncertainty exists about
whether an obligation to transfer cash or other assets has arisen and/or the
amount that will be required to settle the obligation. A contingency is “an
existing condition, situation, or set of circumstances involving uncertainty as
to possible gain (contingent assets) or loss (contingent liability) to an
enterprise that will ultimately be resolved when on or more future events
occur or fail to occur.”
The owners’ equity (shareholders’ equity) section is one of the most difficult
sections of the statement of financial position to prepare and understand.
This is due to the complexity of capital stock agreements and the various
restrictions on shareholders’ equity imposed by state corporation laws,
liability agreements, and boards of directors.
The ownership or shareholders’ equity accounts in a corporation differ
considerably from those in a partnership or proprietorship. Partners show
separately their permanent capital accounts and the balance in their
temporary accounts (drawing accounts). Proprietorships ordinarily use a
single capital account that handles all of the owner’s equity transactions.

At the end of this module, you will be able to:

1. Understand the nature and classification of contingent liabilities and
contingent assets
2. Understand the definition of equity and the terms used depending on the
form of entity
3. Determine the elements constituting shareholders’ equity
4. Prepare the statement of financial position

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Statement of financial position

Contingent liability and contingent asset

Contingent liability

PAS 37, paragraph 10, defines a contingent liability in two ways:

It is a possible obligation that arises from past event and whose existence will be confirmed
only by the occurrence or nonocurrence of one or more uncertain future events not wholly
within the control of the entity.

It is a present obligation that arises from past event but is not recognized because it is not
probable that an outflow of resources embodying economic benefits will be required to
settle the obligation or the amount of the obligation cannot be measured reliably.

A contingent liability is not recognized in the financial statements. It shall be disclosed only.

However, if the present obligation is probable and the amount can be measured reliably, the
obligation is not a contingent liability but shall be recognized as a provision. An expense and
an estimated liability shall be recorded in recognizing a provision.

If the contingent liability is remote, no disclosure is necessary.

The uncertainty relating to future events can be expressed by a range of outcome. The range
of outcome may be described as follows:

a) Probable – The future event is likely to occur. As a rule of thumb, probable means
more than 50% more than likely.

b) Reasonably possible – The future event is less likely to occur.

c) Remote – The future event is least likely to occur or the chance of future event
occurring is very slight.

Contingent asset

PAS 37, paragraph 10, defines contingent asset as a “possible asset that arises from past
event and whose existence will be confirmed only by the occurrence or nonoccurrence of
one or more uncertain future events not wholly within the control of the entity.”

An example is a claim that an entity is pursuing through legal processes when the outcome
is uncertain.

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Statement of financial position

A contingent asset shall not be recognized because this may result to recognition of income
that may never be realized.

However, when the realization of income is virtually certain, the related asset is no longer
contingent asset and its recognition is appropriate.

A contingent asset is only disclosed when it is probable. If the contingent asset is only
possible or remote, no disclosure is required.

Elements of shareholders’ equity

The term equity is the residual interest in the assets of the entity after deducting all of the
liabilities. Simply stated, equity means “net assets or total assets minus liabilities.
Equity is increased by profitable operations and contribution by owners while it is decreased
by unprofitable operations and distribution to owners.
The terms used in reporting the equity of an entity depending on the form of the entity are:
a) Owner’s equity in a proprietorship
b) Partners’ equity in a partnership
c) Stockholders’ equity or shareholders’ equity in a corporation
Shareholders’ equity
Shareholders’ equity or stockholders’ equity is the residual interest of owners in the net
assets of a corporation measured by the excess of assets over liabilities.
Generally, the elements constituting shareholders’ equity with their equivalent IAS term are:
Philippine term IAS term
Capital stock Share capital
Subscribed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preference share capital
Additional paid capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
Share capital is the portion of the paid in capital representing the total par or stated value of
the shares issued.
Subscribed share capital is the portion of the authorized share capital that has been
subscribed but not yet fully paid and therefore unissued.
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Statement of financial position

Subscription receivable shall preferably be reflected as a deduction from the related

subscribed share capital. However, subscription receivable collectible within one year shall
be classified as current asset.
Share premium is the capital contributed by the shareholders in excess of the par or stated
value of the shares subscribed and issued.
Retained earnings
Retained earnings represent the cumulative balance of periodic net income or loss, dividend
distributions, prior period errors, changes in accounting policy and other capital
adjustments.
Retained earnings may be classified as unappropriated retained earnings and appropriated
retained earnings.
Unappropriated retained earnings represent that portion which is free and can be declared
as dividends to the shareholders.
Appropriated retained earnings represent that portions which is restricted and therefore
not available for any dividend declaration.
A deficit is a debit balance in retained earnings. The deficit is a deduction from shareholders’
equity.
Revaluation surplus
Revaluation surplus is the excess of sound value over carrying amount of the revalued asset.
Sound value is equal to the fair value or the revalued amount computed by deducting
accumulated depreciation from replacements cost. It is also known as “depreciated
replacement cost.”
Carrying amount is computed by deducting accumulated depreciation on cost from historical
cost.
Treasury shares
Treasury shares are an entity’s own shares that have been issued and then reacquired but
not canceled.
Treasury shares are usually recorded at cost and are not recognized as asset. The cost of
treasury shares shall be reported as a deduction from the shareholders’ equity.
Reserves
The term “reserves” is not officially defined in any accounting standard or in the Conceptual
Framework. Reserves form a substantial part of the equity of an entity.
Under international accounting standard, the use of equity reserves is based on whether a
reserve is part of distributable or nondistributable equity.

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Distributable equity is that portion that can be distributed to shareholders as dividends

without impairing the legal capital of the entity. This squarely pertains to unappropriated
retained earnings.
Nondistributable equity represents those items of equity other than the aggregate par or
stated value of share capital and retained earnings unappropriated.
Examples of reserves:
a) Share premium reserve is the excess over the par or stated value.
b) Appropriation reserve is the earmarking of retained earnings for a certain purpose
which may be required by law, contract or the result of a voluntary action of
management. Examples include retained earnings appropriated for treasury shares,
for bond redemption, for plant expansion and for contingencies.
c) Asset revaluation reserve
d) Other comprehensive income reserve

Reporting classification of statement of financial position

In the Philippines, the common practice is to present in the statement of financial position
current assets before noncurrent assets, current liabilities before noncurrent liabilities, and
equity after liabilities.
PAS 1, paragraph 57, provides that “the standard does not prescribe the order or format in
which line items are to be presented.” In practice, there are two customary forms in
presenting the statement of financial position, namely:
1. Report form – This form sets forth the three major sections in a downward
sequence of assets, liabilities and equity.
2. Account form – As the title suggests, the presentation follows that of an account,
meaning, the assets are shown on the left side and the liabilities and equity on the
right side of the statement of financial position.
Infrequently, companies use other balance sheet formats, For example, companies
sometimes deduct current liabilities from current assets to arrive at working capital or
they deduct all liabilities from all assets.

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Statement of financial position

Illustrative statement of financial position

Illustration – report form

Illustration - Report
Form.xlsx

Illustration – account form

Illustration -
Account Form.xlsx

References and Supplementary Materials

Books and Journals

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 3; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 1; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield; 2013; Intermediate Accounting;

United States; John Wiley & Sons, Inc.

Online Supplementary Reading Materials

IAS 1 Presentation of Financial Statements; http://www.ifrs.org/issued-standards/list-
of-standards/ias-1-presentation-of-financial-statements/; October 30, 2017

IFRS 2 Share-based Payment; http://www.ifrs.org/issued-standards/list-of-

standards/ifrs-2-share-based-payment/; October 30, 2017

IAS 37 Provisions, Contingent Liabilities and Contingent Assets;

http://www.ifrs.org/issued-standards/list-of-standards/ias-37-provisions-contingent-
liabilities-and-contingent-assets/; October 30, 2017

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Online Instructional Videos

Balance Sheet and Income Statement Relationship;
https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-
financial-stateme/financial-statements-tutorial/v/balance-sheet-and-income-statement-
relationship; January 10, 2018

Financial Statements- Lecture 7- The Statement of Financial Position- IFRS;

https://www.bing.com/videos/search?q=statement+of+financial+position&&view=detail
&mid=60F5FC3563CF3AF4537C60F5FC3563CF3AF4537C&FORM=VRDGAR; January 10,
2018

Statement of Financial Position;

https://www.bing.com/videos/search?q=statement+of+financial+position&&view=detail
&mid=9B6C89069BFCB356AA209B6C89069BFCB356AA20&FORM=VRDGAR; January 10,
2018

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