Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a given date. It is comprised of three main components: Assets , liabilities and equity .
Statement of Financial Position helps users of financial statements to assess the financial soundness of an entity in terms of liquidity risk, financial risk, credit risk and business risk.
Following is an illustrative example of a Statement of Financial Position prepared under the format prescribed by IAS 1 Presentation of Financial Statements.
Statement of Financial Position as at 31st December 2020
USD
Assets
Non-current assets
Property, plant & equipment
130,000
30,000
60,000
220,000
Current assets
12,000
25,000
Cash and cash equivalents
8,000
45,000
Total assets
265,000
Equity and liabilities
Equity
100,000
50,000
15,000
Total equity
165,000
Non-current liabilities
35,000
Current liabilities
Trade and other payables
35,000
10,000
Current portion of long-term borrowings
15,000
Current tax payable
5,000
65,000
Total liabilities
100,000
Total equity and liabilities
265,000
You may download a free blank excel template of the statement of financial position . The template is pre-linked with the cash flow statement and statement of changes in equity.
An asset is something that an entity owns or controls in order to derive economic benefits from its use. Assets must be classified in the balance sheet as current or non-current depending on the duration over which the reporting entity expects to derive economic benefit from its use. An asset which will deliver economic benefits to the entity over the long term is classified as non-current whereas those assets that are expected to be realized within one year from the reporting date are classified as current assets.
Assets are also classified in the statement of financial position on the basis of their nature:
A liability is an obligation that a business owes to someone and its settlement involves the transfer of cash or other resources. Liabilities must be classified in the statement of financial position as current or non-current depending on the duration over which the entity intends to settle the liability. A liability which will be settled over the long term is classified as non-current whereas those liabilities that are expected to be settled within one year from the reporting date are classified as current liabilities.
Liabilities are also classified in the statement of financial position on the basis of their nature:
Equity is what the business owes to its owners. Equity is derived by deducting total liabilities from the total assets. It therefore represents the residual interest in the business that belongs to the owners.
Equity is usually presented in the statement of financial position under the following categories:
The balance sheet is structured in a manner that the total assets of an entity equal to the sum of liabilities and equity. This may lead you to wonder as to why the balance sheet must always be in equilibrium.
Assets of an entity may be financed from internal sources (i.e. share capital and profits) or from external credit (e.g. bank loan, trade creditors, etc.). Since the total assets of a business must be equal to the amount of capital invested by the owners (i.e. in the form of share capital and profits not withdrawn) and any borrowings, the total assets of a business must equal to the sum of equity and liabilities.
This leads us to the Accounting Equation : Assets = Liabilities + Equity
Statement of financial position helps users of financial statements to assess the financial health of an entity. When analyzed over several accounting periods, balance sheets may assist in identifying underlying trends in the financial position of the entity. It is particularly helpful in determining the state of the entity’s liquidity risk, financial risk, credit risk and business risk. When used in conjunction with other financial statements of the entity and the financial statements of its competitors, balance sheet may help to identify relationships and trends which are indicative of potential problems or areas for further improvement. Analysis of the statement of financial position could therefore assist the users of financial statements to predict the amount, timing and volatility of entity’s future earnings.