Balance (Statement of Financial Position)

Balance Sheet: The Foundation of Financial Reporting
The Balance (Balance Sheet, Statement of Financial Position) is a snapshot of a company's financial position at a specific date. It shows what the company owns (assets), owes (liabilities), and the owners’ share (equity). Understanding the balance sheet is foundational for analyzing any business.

The basic balance equation Assets = Liabilities + Equity is the fundamental equation of accounting. Assets are financed either through borrowed funds (liabilities) or the owners’ funds (equity). The equation is always in balance—hence the name “balance.” Every transaction affects both sides of the equation. If a company takes a loan, assets (cash) increase and so do liabilities (debt). If it issues shares, both assets and equity rise. If it purchases equipment with cash, one asset decreases while another increases.

Assets (Assets)

Assets are resources controlled by the company as a result of past events, from which economic benefits are expected to be received. Assets are classified by degree of liquidity—the ability to quickly be converted into cash.

• Current Assets: Assets expected to be realized, sold, or used up within one operating cycle (usually a year). These include:

  • Cash and equivalents (the most liquid asset)
  • Short-term financial investments (marketable securities)
  • Accounts receivable—amounts owed by customers
  • Inventory—raw materials, work-in-progress, finished goods
  • Prepaid expenses

• Non-current Assets (Long-term Assets): Assets used for more than one year.

  • Property, Plant & Equipment (PP&E)—land, buildings, equipment, transport. Reflected at original cost less accumulated depreciation.
  • Intangible Assets—patents, trademarks, licenses, goodwill (arising on acquisition).
  • Long-term financial investments—investments in other companies held for more than a year.

Liabilities (Liabilities)

Liabilities are a company’s current obligations arising from past events, the settlement of which will result in an outflow of resources. They are classified by maturity.

• Current Liabilities: Obligations due within one year.

  • Accounts payable—amounts owed to suppliers
  • Short-term loans and current portion of long-term debt
  • Accrued liabilities—salary, taxes, interest accrued but unpaid
  • Deferred revenue—advances received for goods/services

• Non-current Liabilities: Obligations with a maturity of more than one year.

  • Long-term loans and bonds
  • Lease liabilities (after IFRS 16, most leases on balance sheet)
  • Pension obligations (defined benefit obligations)
  • Deferred tax liabilities

Equity (Equity, Shareholders’ Equity)

Equity is the residual interest in assets after deducting all liabilities. It is what belongs to shareholders. The structure of equity reflects the history of the company’s financing.

• Components of equity:
  • Common Stock (Share Capital)—par value of issued shares
  • Additional Paid-in Capital (Share Premium)—amount received above par upon share issuance
  • Retained Earnings—cumulative profit not distributed as dividends
  • Other Comprehensive Income—unrealized gains/losses (revaluation, currency differences)
  • Treasury Stock—own repurchased shares, reduces equity

Presentation Formats

• Vertical format (Report Form): Assets at the top, liabilities and equity at the bottom. More common in modern practice.

• Horizontal format (Account Form): Assets on the left, liabilities and equity on the right. Clearly shows the balance equation.

• Liquidity classification: Standardly, assets are arranged from most to least liquid (as in US practice). Under IFRS, the order can be reversed—from least to most liquid.

Differences between IFRS and US GAAP

• Order of presentation: US GAAP requires current assets to be presented first; IFRS allows both options.
• Terminology: US GAAP uses “Stockholders’ Equity”; IFRS uses “Shareholders’ Equity” or simply “Equity.” The names of individual items may also differ.
• Revaluation: IFRS allows PP&E to be revalued at fair value; US GAAP permits only historical cost (subject to impairment). This can significantly affect balance sheet comparability.

Analytical Aspects

When analyzing the balance sheet, it is important to consider:

• The ratio of current to non-current assets (asset structure)
• The ratio of equity to borrowed capital (capital structure, leverage)
• Asset quality (questionable receivables, obsolete inventory, impaired PP&E)
• Off-balance-sheet obligations (operating leases before IFRS 16, guarantees, contingent liabilities)