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Financial Accounting 3% exam weight

Statement of Financial Position (Balance Sheet)

Part of the ACCA/CA Pakistan study roadmap. Financial Accounting topic financ-003 of Financial Accounting.

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Topic 3: Statement of Financial Position (Balance Sheet)

🟢 Lite — Quick Review (1h–1d)

IAS 1 — Balance Sheet Presentation

Current vs Non-Current (IAS 1.66-69):

Present assets/liabilities as CURRENT unless directly linked to operating cycle > 12 months.

Current Assets: Cash, bank, assets expected to be realised/sold/consumed within 12 months, trading securities, inventories, trade receivables.

Current Liabilities: Obligations settled within 12 months, bank overdraft (always current), trade payables, current portion of long-term debt.

Non-Current Assets: PPE, intangible assets, investments held long-term, deferred tax assets (IAS 12).

Key Equity Components:

  • Share capital (ordinary shares)
  • Share premium
  • Revaluation surplus (IAS 16 — non-distributable)
  • Retained earnings (distributable)
  • Other reserves (general reserve, capital reserve)

⚡ Exam tip: Inventory is ALWAYS current even if it takes >12 months to sell — because it’s part of normal operating cycle. An asset held for sale (IFRS 5) is classified as current regardless of timeline.

🟡 Standard — Regular Study (2d–2mo)

IAS 1 — Statement of Financial Position

IAS 1 specifies minimum line items on the face of the SoFP:

Assets:

  • Property, Plant and Equipment
  • Investment Property (IAS 40)
  • Intangible Assets (IAS 38)
  • Financial Assets (IFRS 9)
  • Investments accounted for using equity method (IAS 28)
  • Deferred Tax Assets (IAS 12)
  • Non-Current Assets held for sale (IFRS 5)
  • Inventories (IAS 2)
  • Trade and Other Receivables
  • Cash and Cash Equivalents (IAS 7)

Equity:

  • Share Capital
  • Share Premium
  • Other Components of Equity
  • Retained Earnings

Liabilities:

  • Financial Liabilities
  • Trade and Other Payables
  • Borrowings (current and non-current)
  • Deferred Tax Liabilities (IAS 12)
  • Provisions (IAS 37)
  • Non-Current Liabilities held for sale (IFRS 5)

Current vs Non-Current — The Operating Cycle Test:

An entity classifies an asset as current when:

  1. It expects to realise the asset within 12 months after reporting date, OR
  2. It holds the asset primarily for trading, OR
  3. It expects to realise the asset within its normal operating cycle

The operating cycle is the time between acquiring materials entering production and receiving cash from sale. For most businesses this is <12 months. Items like wine, luxury goods, or construction contracts with long-term projects may have cycles >12 months but are STILL classified as current if within the operating cycle.

IAS 1 Disclosure Requirements:

Minimum disclosures (IAS 1.77-80):

  • For each asset and liability line: carrying amount at period start and end
  • For equity: reconciliation of opening to closing for each component
  • For non-current assets held for sale: fair value less costs to sell
  • Maturity analysis for financial liabilities (IAS 1.61)
  • Collateral pledged for liabilities
  • Accounting policies applied

Off-Balance Sheet Items:

Entities must disclose (via notes) contingent liabilities (IAS 37) and commitments (undisclosed commitments for capital expenditure, forward contracts). These are NOT on the face of SoFP.

Going Concern (IAS 1.25-26):

If management is aware of material uncertainties about going concern, these must be disclosed. If the entity is NOT a going concern, a different measurement basis is used (liquidation basis).

⚡ Exam tip: Bank overdraft is ALWAYS classified as current liability even if it’s part of a long-term banking arrangement. Students frequently misclassify it as non-current.

🔴 Extended — Deep Study (3mo+)

Comprehensive Analysis — Balance Sheet Presentation & Disclosures

IAS 1 — Ordering of Assets and Liabilities:

IAS 1 does NOT mandate order of items. Entities may choose:

  • Current first (most common in Pakistan)
  • Non-current first (permitted by IAS 1.60)

Within categories, IAS 1.66-67 suggests listing in order of liquidity. However, entities in Pakistan under the Companies Ordinance 1984 (as amended) follow the prescribed format with current first.

Measurement Bases on the Balance Sheet:

ItemMeasurement Base
PPE (cost model)Cost less accumulated depreciation less accumulated impairment
PPE (revaluation model)Fair value at revaluation date less subsequent accumulated depreciation and impairment
Investment Property (cost model)Cost less accumulated depreciation
Investment Property (FV model)Fair value — changes in P&L
Intangible AssetsCost less accumulated amortisation and impairment
InventoriesLower of cost and NRV
Financial AssetsClassification determines: Amortised Cost, FVPL, or FVOCI
Assets held for saleLower of carrying amount and fair value less costs to sell

Equity — Deep Dive:

Share Capital: Represents nominal value of shares issued. Pakistan companies issue par value shares — excess over par goes to Share Premium (also called Capital Reserve in some jurisdictions).

Revaluation Surplus (IAS 16): Created when PPE is revalued upward. This reserve:

  • Is NOT distributable until the asset is disposed of
  • Can be used to capitalise bonus shares (subject to company law)
  • On disposal: transferred to retained earnings (not recycled through P&L)
  • Can be used to absorb revaluation losses (IAS 16.35)

Retained Earnings: Accumulated profits less dividends and losses. Represents earnings retained in business. Distributable reserves subject to law (Companies Ordinance Pakistan: only accumulated realised profits, less accumulated realised losses, can be distributed as dividends).

Other Reserves:

  • General Reserve: Created by annual appropriations from P&L (mandatory in Pakistan)
  • Capital Reserve: Created from non-operating profits (e.g., profit on forfeiture of shares, surplus on capital reduction)
  • Dividend Equalisation Reserve: To maintain consistent dividend payout

IAS 37 — Provisions, Contingent Liabilities, Contingent Assets:

Provision: Present obligation, probable outflow, reliable estimate possible → RECOGNISED as liability.

Contingent Liability: Present possible obligation OR present obligation not probable/not reliably measurable → DISCLOSED (unless probability remote).

Contingent Asset: Possible asset arising from past events → DISCLOSED (unless probability remote).

Non-Current Assets Held for Sale — IFRS 5:

Conditions (ALL must be met):

  1. Immediately available for sale in present condition
  2. Sale highly probable (active program to locate buyer, asking price reasonable, expected to complete within 12 months)
  3. Asset must be exchanged for cash (not distribution to owners)

Measurement: Carrying amount = lower of carrying amount and fair value less costs to sell. Depreciation STOPPED once classified as held for sale.

Worked Example — Classification:

PakElectronics Ltd has: PPE Rs.50m (net), Inventory Rs.12m (normal cycle 6 months), Trade Receivables Rs.8m, Bank Overdraft Rs.3m, 5-year Loan Repayable in Year 3 Rs.20m, Trade Payables Rs.6m, Deferred Tax Asset Rs.1.5m.

NON-CURRENT ASSETS:
PPE                          50,000,000
Deferred Tax Asset            1,500,000
                            51,500,000

CURRENT ASSETS:
Inventories                  12,000,000
Trade Receivables             8,000,000
                            20,000,000

TOTAL ASSETS                 71,500,000

EQUITY:
Share Capital                25,000,000
Revaluation Surplus           5,000,000
Retained Earnings            18,500,000
                            48,500,000

NON-CURRENT LIABILITIES:
5-Year Loan                 20,000,000

CURRENT LIABILITIES:
Bank Overdraft                3,000,000
Trade Payables                6,000,000
                             9,000,000

TOTAL EQUITY & LIABILITIES   71,500,000

Common Exam Mistakes:

  • Classifying bank overdraft as non-current (it’s always current)
  • Treating inventory as non-current even though operating cycle is <12 months (still current)
  • Confusing revaluation surplus (non-distributable) with capital reserve (may be distributable on dissolution)
  • Forgetting deferred tax assets/liabilities in non-current section
  • Misclassifying “assets held for sale” — must be separately presented, not netted against liabilities
  • Not disclosing the nature of equity components when amounts appear unusual

Practice Tips:

  • For balance sheet preparation questions, always check whether the cost model or revaluation model applies
  • Watch for “restrictive covenant” questions — some loan agreements may restrict dividend distribution, affecting retained earnings presentation
  • In group accounts, remember to eliminate intra-group balances and show NCI separately

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