Current and Non-current Assets – Liabilities

Introduction

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

Current Assets vs. Non-current Assets

Current assets are assets which are primarily held for trading or which are expected to be sold, used up or otherwise realized in cash within the greater of a year or one business operating cycle, after the reporting period. They provide information about the operating activities and the operating capability 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 those assets which are not expected to be sold or used up within the greater of a year or one business operating cycle. These are oftentimes referred to as long-term or long-lived assets, and represent the infrastructure from which an 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 which are expected to be settled within the greater 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 entity’s normal operating cycle;
  • 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 an entity’s normal operating cycle. As such, these operating items are classified as current liabilities irrespective of when they will be settled.

Non-current liabilities or long-term liabilities refers 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 group of assets are non-current assets?

A. Accrued expenses and deferred income

B. Long-term financial liabilities and deferred tax liabilities

C. Goodwill and property, plant, and equipment

Solution

The correct answer is C.

Goodwill and property, plant, and equipment are examples of non-current assets. Statement A provides gives examples of current liabilities, while statement B gives examples of non-current liabilities.

Question 2

Mark’s Toys has an operating cycle of 15 months. The company reported in its latest financial reports accrued labor expenses of $300,000. 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?

A. The whole amount would be classified as a non-current liability.

B. The whole amount would be classified as a current liability.

C. $200,000 would be classified as a current liability, and $100,000 would be classified as a non-current liability.

Solution

The correct answer is B.

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

 

Reading 24 LOS 24d:

Distinguish between current and non-current assets and current and noncurrent liabilities

 

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