Current and Non-current Assets – Liabilities

The classified balance sheet distinguishes between current and non-current assets and between current and non-current liabilities. It classifies them separately.

Current Assets vs. Non-current Assets

Current assets are assets that are primarily held for trading or which are expected to be sold, used up, or otherwise realized in cash within the greater part of a year or one business operating cycle, after the reporting period. They provide information about the operating activities and the operating capacity of a company. Examples of current assets include cash and cash equivalents, trade and other receivables, inventories, and financial assets (with short maturities).

Non-current assets, on the other hand, are assets that are not expected to be sold or used up within the greater part of a year or one business operating cycle. These assets are oftentimes referred to as long-term or long-lived assets. They represent the infrastructure upon which a business entity operates. Investments in these assets are made from a strategic and longer-term perspective. Examples of non-current assets include property, plant and equipment, investment property, goodwill, intangible assets, and financial assets (with long maturities).

Current Liabilities vs. Non-current Liabilities

Current liabilities are liabilities that are expected to be settled within the greater part of a year or one business operating cycle, after the reporting period. To be classified as ‘current’, a liability must satisfy at least one of the following criteria:

• the liability is expected to be settled during the normal operating cycle of a business entity;
• the liability is held primarily for trading purposes;
• the liability is due to be settled within a year after the balance sheet date; or
• there is no unconditional right for deferral of settlement of the liability for at least a year after the balance sheet date.

Examples of current liabilities include trade payables, financial liabilities, accrued expenses, and deferred income.

IFRS specifies that certain current liabilities, namely trade payables and some accruals, should be considered part of the working capital used in the normal operating cycle of a business entity. As such, these operating items are classified as current liabilities irrespective of when they will be settled.

Non-current liabilities or long-term liabilities refer to all other liabilities, including financial liabilities, which provide financing on a long-term basis. Two common examples of non-current liabilities are long-term financial liabilities and deferred tax liabilities.

Question 1

Which of the following groups of assets are non-current assets?

A. Accrued expenses and deferred income.

B. Goodwill and property, plant, and equipment.

C. Long-term financial liabilities and deferred tax liabilities.

Solution.

The correct answer is B.

Goodwill and property, plant, and equipment are examples of non-current assets.

A is incorrect. It gives examples of current liabilities.

C is incorrect. It gives examples of non-current liabilities.

Question 2

Mark’s Toys has an operating cycle of 15 months. The company reported accrued labor expenses of $300,000 in its latest financial reports. The company expects to pay only two-thirds of the whole amount this year. How would the company classify the $300,000 on its balance sheet?

1. The whole amount would be classified as a current liability.
2. The whole amount would be classified as a non-current liability.
3. $200,000 would be classified as a current liability and $100,000, as a non-current liability.

Solution

The correct answer is A.

Operation-related expenses should be classified as current liabilities even if a company is expected not to settle them within one operating cycle or one year. Since accrued operating labor cost is an operating expense, the whole amount would be considered a current liability.