Q

Classification of liabilities vs classification of assets

Classification of liabilities is based on the same principles as the classification of assets

Question.'Classification of liabilities is based on the same principles as the classification of assets.'  Do you agree with this?  Why or why not? 

As per the provisions of AASB 101 , the reporting entity is required to report the operations in an honest and fair manner. In general, the balance sheet is prepared on the basis ofpermanence or a classified balance sheet. A classified balance sheet is a balance sheet in which the assets and liabilities are presented in the form of current assets, current liabilities, fixed assets, long term liabilities, shareholders equity etc. in order so that the viewer and the reader is able to grasp the essence of the financial position at a glance.

When a classifiedbalance is made the assets and liabilities are quite classified similarly. While assets are classified like current assets followed by the long term assets, the liabilities are classified as current liability first and long-term liabilities and shareholder's equity later.

On the asset side the current assets are shown in the beginning if it satisfies the following criteria:

a)      The asset is held for trading or

b)      The asset is held with the expectation of being released within the current operating cycle of the company concerned.

c)      The assets are also expected to be sold and released within the next twelve-month period and are classified as either cash or equivale tot cash. 

Assets which satisfies all of the above conditions or any one of them is classified as current assets in the current balance sheet and assets which are expected to not meet the above criteria's are shown as non-current in the books. Non-current or long-termassets include intangible assets, tangible assets and other financial assets with a life term of More than twelve months duration. So assets are basically classified as either short-term (current) or noncurrent in the balance sheet of a reporting entity(BAKER & CORTRELL, 2011).

Like the current assets, the current liabilities are termed as so if they fulfill the following criteria:

a)      A liability, in general, would be classified as current if the liability under analysis is expected to be settled within the operating cycle of the reporting entity.

b)      The liability is held for a trading purpose

c)      The assets are also expected to be settled within the next twelve-month period form the operating cycle reported date.

d)     The reporting entity is not entitled to defer the settlement of the said liability unconditionally for at least a period of 12 months from the date of reporting the same.

Similarly, financial liabilities would be branded and reported as current in the present balance sheet if they are expected to fall due within the next 12 months form reporting date even if the financial liabilities are of greater maturity.  A part can be reported as current if the liability is expected to become partially due in the next 12 months from the date of reports(ATRILL & EDDIE, 2012). 

All other kinds of liabilities would report in the books as long term liabilities which would mature in the future and exactly the opposite of the long term or fixed assets.

Thus, from the analysis of the above shows that assets and liabilities are classified and reported quite similarly by reporting entity following similar regulations under AASB and IFRS. This classification of reporting short-term assets and liabilities first and then the long-term assets and liabilities ensure the analysts and investors are aware ofthe current debt and paying obligations ad are easily capable of identifying the liabilities separately to compare against the assets etc. also the current debt obligations and future debt obligations can be seen in different lights from this classification as well. 

RELATED:


Leave a comment


       
Captcha

Related :-