Accounting: The Language of Business - Vol. 2 (Intermediate: Part 69)

Considering that future generations will be far better off than current generations even after accounting for climate change, it would be more equitable for today's industrialized world to help solve the real problems facing today's poorer developing world than to mitigate climate change now to help reduce the burden on future populations that would not only be wealthier but also technologically superior.

Indur M. Goklany

Statements of Financial Position and Cash Flows and the Annual Report (Part G)

by

Charles Lamson

Balance Sheet Presentation: International Financial Reporting Standards (IFRS)

IFRS allows an alternative presentation of assets and liabilities by liquidity rather than current and noncurrent groupings [as with generally accepted accounting principles (GAAP or U.S. GAAP), which was discussed in Part 68] so that companies can choose the most effective presentation for financial statement users. company managers determine the presentation based on their knowledge of the company and its operations.

Asset Presentation: IFRS. IFRS-reporting companies can present either current assets or noncurrent assets first. So, IFRS permits asset presentation in either a decreasing or an increasing order of liquidity. When using an increasing order of liquidity, the least liquid assets are typically presented first within each balanced section. Exhibit 6.4 recasts the Breanne Baking Equipment companies balance sheet into an IFRS-allowable format by reporting non-current assets before current assets and using reverse liquidity ordering.

EXHIBIT 6.4 IFRS Acceptable Form Balance Sheet

Liabilities Presentation: IFRS. Similarly to asset presentation, IFRS does not prescribe the ordering of liabilities within each group. In Exhibit 6.4, Breanne Baking Company reports current liabilities before noncurrent liabilities on its balance sheet unlike its presentation of noncurrent assets before current assets.

Balance Sheet Format: IFRS. Under IFRS, aside from the current and noncurrent (or liquidity) presentations, companies have flexibility regarding the format of their balance sheets. For example, Breanne Baking Equipment Company's balance sheet in Exhibit 6.4 includes the total of net assets, $66,000 at December 31, 2018. Net assets, equal to assets minus liabilities, is another term used for equity. Notice in Exhibit 6.4 that Breanne's total stockholders equity is also $66,000. 

Exhibit 6.4 illustrates the use of the increasing order of liquidity with regard to assets. 

Judgment and Balance Sheet

Earnings management was introduced in Parts 45 and 46 related to reported earnings numbers. Managers also make judgments related to amounts reported as assets and liabilities on the balance sheet. because managers have incentives to manage the balance sheet, financial statement users should be aware of balance sheet management.

Consider the concepts of liquidity, solvency, and financial flexibility. Financial statement users prefer to provide resources to entities with a high level of liquidity, solvency, and financial flexibility. Thus, managers may classify liabilities as noncurrent as opposed to current to enhance the user's perception of the entity's liquidity. As another example, managers have an incentive to classify an item as equity as opposed to debt or not to report a debt on the balance sheet at all in order to enhance the perception of solvency and financial flexibility.

In addition to these incentives, a judgment that results in earnings management in turn results in balance sheet management. For example, if an entity makes a choice not to record warranty expense, then it is simultaneously making the decision not to report a warranty liability, which improves a company's liquidity position. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 244-245*

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