Alternative Formats of Balance Sheet Presentation

Some entities prepare their financial statements in accordance with International Financial Reporting Standards (IFRS), while others prepare their financial statements in accordance with the United States Generally Accepted Accounting Principles (US GAAP).

The choice of standards or principles is usually a function of the jurisdiction in which a business entity and the users of its financial statements are domiciled. Entities domiciled in the United States of America tend to prepare their financial statements in accordance with US GAAP, while companies in Europe tend to prepare their financial statements in accordance with IFRS.

Alternative Balance Sheet Presentation Formats

US GAAP uses the title ‘Balance Sheet’, while IFRS uses the title ‘Statement of Financial Position’. This difference in name notwithstanding, both statements report on the three basic elements i.e. assets, liabilities, and equity.

IFRS and US GAAP both require that the balance sheet distinguishes between current and non-current assets and between current and non-current liabilities and classifies them separately. This format of the balance sheet is referred to as a classified balance sheet. (See table 1)

$$\textbf{Table 1: Example of a Classified Balance Sheet} $$

$$ \begin{array}{l|r|r} \textbf{Assets} & \bf {\text{Dec } 31,2016($)} & \bf {\text{Dec } 31,2015($)} \\ \hline \text{Total current assets} & {3,450,000} & {3,130,235} \\ \hline \text{Total non-current assets} & {6,754,231} & {5,998,567} \\ \hline \textbf{Total assets} & \bf{10,204,231} & \bf{9,128,802} \\ \hline \textbf{Equity and liabilities} & {} & {} \\ \hline \text{Total current liabilities} & {2,457,756} & {2,176,256} \\ \hline \text{Total non-current liabilities} & {4,376,434} & {3,956,275} \\ \hline \textbf{Total liabilities } & {6,834,190} & {6,132,531} \\ \hline \textbf{Shareholders’ equity} & {3,370,041} & {2,996,271} \\ \hline \textbf{Total liabilities and shareholders’ equity} & \bf{10,204,231} & \bf{9,128,802} \\ \end{array} $$

Under IFRS, an entity is not required to have separate classifications as long as a liquidity-based presentation provides reliable and more relevant information than a classified balance sheet does.  In a liquidity-based presentation, all assets and liabilities are presented in order of liquidity i.e. according to how easily they can be converted into cash (See table 2).

$$\textbf{Table 2: Example of a Liquidity-based Balance Sheet Presentation (Showing Assets Segment Only)} $$

$$ \begin{array}{l|r|r} \textbf{Assets} & \bf{\text{Dec } 31,2016($)} & \bf{\text{Dec } 31,2015($)} \\ \hline \text{Cash} & {1,250,000} & {1,603,235} \\ \hline \text{Bank deposits} & {6,754,231} & {5,998,567} \\ \hline \text{Financial assets at fair} & {12,204,231} & {7,527,802} \\ \text{value through profit or loss} & {} & {} \\ \hline \text{Securities purchased under} & {3,145,846} & {1,567,251} \\ \hline \text{resale agreement} & {} & {} \\ \hline \text{Interest receivable} & {2,457,756} & {2,176,256} \\ \hline \text{Loans and receivables} & {4,376,434} & {3,956,275} \\ \hline \text{Available for sale} & {6,834,190,} & {6,132,531} \\ \hline \text{financial assets} & {} & {} \\ \hline \text{Held-to-maturity} & {3,370,041} & {2,996,271} \\ \text{investments} & {} & {} \\ \hline \text{Fixed assets} & {2,204,231} & {2,128,802} \\ \hline \text{Other assets} & {1,795,000} & {1,500,354} \\ \hline \textbf{Total assets} & \bf{44,391,960} & \bf{35,587,344} \\ \end{array} $$

Question 1

Which of the following statements accurately describes a classified balance sheet format?

1. Assets and liabilities are broadly presented in order of liquidity.
2. Cash flow from operations is distinguished from cash flow from investing and financing activities.
3. A distinction is made between current and non-current assets and between current and non-current liabilities and they are classified separately.

Solution

The correct answer is C.

Statement A describes a liquidity-based presentation, while statement B describes a cash flow statement.

Question 2

In a liquidity-based presentation of the balance sheet, which of the following items would appear first on the side of assets?

1. Land & property.
2. Accounts receivable.
3. Cash & cash equivalents.

Solution

The correct answer is C.

In a liquidity-based presentation of the balance sheet, the most liquid items show first on the side of assets on the balance sheet. As cash is the most liquid asset, it would be listed on the top.