FRF for SMEs—Classifications in the Statement of Financial Position
While some of these presentation issues may be basic, using the FRF for SMEs requires a thorough understanding of all concepts included in the framework. As it is for other reporting frameworks, classification of assets and liabilities as current and non-current will usually be the most appropriate presentation. Determination of an item’s classification as current or non-current is also similar to other frameworks.
Current assets are normally those that will be realized within one year from the reporting date, or the operating cycle if longer. As is customary, current assets will be presented in major classes such as cash, receivables and inventories. Accounts and notes receivable should be classified as trade counts, amounts receivable from related parties and other significant balances. Principles of accounting for major classifications in the statement of financial position and statement of operations are presented in the framework document and will be discussed in future blogs.
Current liabilities include amounts payable in the year following the reporting date, unless the operating cycle is longer. Payments received from customers or clients for goods or services to be delivered in the year following the reporting date should be included in this classification as current, deferred revenues. Contractual arrangements for settlement of obligations from other than current assets should be excluded from current liabilities. Major classes of currently liabilities such as accounts payable, income taxes payable, accrued expenses and the current portion of long-term obligations should be presented separately.
Long-term debt will be presented as a non-current liability unless the creditor has the right to demand payment and that right has not been waived; in such a case the obligation would be presented as a current liability. If a commitment for refinancing in the year subsequent to the reporting date has been obtained before the financial statements are available for issue, the obligation would remain in the non-current classification. When long-term debt covenants have been violated, the obligation would be classified as current unless the creditor has waived its right to demand payment for a period of more than one year from the financial statements’ reporting date. Disclosure requirements for long-term debt are similar to those under U.S. GAAP.
Liabilities for financial instruments should be classified in whole or in part as liabilities or equity based on the definitions in this framework and the substance of related agreements. A financial asset and liability should only be presented as a net amount in the statement of financial position when a legal right of offset exists or when a net settlement, or simultaneous settlement, is intended.
I will present four, two-hour webcasts for this framework later this fall. You can access information and register by clicking on the “Live Webcasts” box on the left side of my home page, www.cpafirmsupport.com.
by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs. He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms. Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations. He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.