Tuesday, 4 June 2013

Current and Noncurrent Liabilities: The Balance Sheet Continued

International Accounting Standard 1: Presentation of Financial Statements or IAS 1 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB) gives clear requirements on the classification of Liabilities.

IAS 1 paragraph 60 stipulates that an entity should present current and non-current liabilities as separate classifications in its statement of financial position, except when a presentation based on liquidity provides more relevant and reliable information. Whatever the method of presentation, an entity should disclose the amount expected to be settled after more than 12 months and less than 12 months.

Paragraph 69a–d of IAS 1 states that liabilities are to be classified as current if any one of four specified conditions is met. The conditions are:

a) It expects to settle the liability in its current operating cycle

b) It holds the liability primarily for trading

c) The liability is due to be settled within 12 months

d) It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

So in terms of classification of current liabilities on the balance sheet they are liabilities the company expects to settle within 12 months of the date on the balance sheet. Settlement comes either from the use of current assets such as cash on hand or from the current sale of inventory. Settlement can also come from swapping out one current liability for another.

Noncurrent or long-term liabilities are ones the company reckons aren’t going anywhere soon! In other words, the company doesn’t expect to be liquidating them within 12 months of the balance sheet date.

Examples of Current Liabilities include:

  • Short term notes payable: Notes due in full less than 12 months after the balance sheet date are short term. For example, a business may need a brief influx of cash to pay mandatory expenses such as payroll. A good example would be a working capital loan, a loan to be paid back in the short term after revenue is earned. 
  • Accounts payable: the account showing the amount payable to a companies lenders. 
  • Dividends payable
  • Current portion of long term notes payable: i.e. the loan amount due in the next 12 months. 
Examples of Noncurrent liabilities include:
  • Long term leases
  • Extended warranties on products
  • Bonds payable: long term amounts due outside the normal 12 months. 

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