An Executive Guide to IFRS: Content, Costs and Benefits to Business

Statement of Financial Position

IAS 1 Presentation of Financial Statements does not prescribe a detailed layout for the balance sheet (Statement of Financial Position) either. It identifies a series of line items that must be included where relevant. The only rules are that the default format distinguishes between current and non-current items. As an exception to this presentation rule, where an entity believes it would give better information, the assets and liabilities may be organized according to liquidity.

In the nineteenth century, accountants referred to fixed assets (long-term capacity such as plant) and circulating assets (assets linked to the business cycle such as inventory and client accounts). Over time the circulating assets were relabelled current assets, and now the fixed assets have been relabelled ‘non-current’ by the international standard-setters.

A rule of thumb in financial reporting is that current assets usually convert to cash in less than a year while non-current assets convert in more than a year. This rather loose notion is made more specific in IFRS. IAS 1 uses the ‘operating cycle’ to distinguish between current and non-current items. The operating cycle is the time taken to complete a single cash to cash transformation in the company’s business. In a manufacturing business, the first part of the cycle is to buy raw materials; these are then processed to create finished goods. The finished goods are sold, probably on credit, and when the client has ...