Detailed in-depth notes for the first year 'Financial Management' paper on 'Balance Sheets'. Mainly based on lectures, with summaries of readings (where applicable), learnings from pre-work problems, and personal explanatory notes included where relevant.
Prepared by a student scoring 88% on the F...
FM Lecture 2 (Balance Sheet)
Definitions
Asset: a present economic resource controlled by the entity as a result of past events
o Capital lease: an asset even though company has not fully paid since the contract's end
goal is to transfer ownership (eg. Airline use aircraft and pays in installments, and they
keep the aircraft at the end)
o Operating lease: an expense (eg. Airline use aircraft for x years and pays an amount per
year. At the end of x years, aircraft is returned)
Liability: a present obligation of the entity to transfer an economic resource as a result of past
events
Economic resource: a right (legal or constructive) that has the potential to produce economic
benefit
Capital/Equity: the residual interest in the assets of the entity after deducting all its liabilities
o Capital: initial investment received (only affected by buybacks/ dividends)
o Retained profit: generated by the company
Recognition and derecognition:
Recognition: only items that meet definitions of assets/liabilities can be included in balance
sheet, but not all items that meet the definition are recognized in the balance sheet
Recognition may not be met if:
o There is uncertainty over existence (<50%)
o Future inflows / outflows of economic benefits are unlikely
o Measurement is uncertain (eg. intangible assets like brand value)
Derecognition: normally occurs when that item no longer meets the definition
o For an asset, that’s when the firm loses control of all or part of the recognized asset
o For a liability, that’s when the firm no longer has a present obligation for all or part of
the recognized liability
Measurement: mixed measurement approach
Historical cost from the transaction event that created the element
Current value:
o Fair value: Exit value. The price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement
date. Assumes a market exists in which asset/liability can be sold or transferred.
Increasingly subjective/ less reliable inputs:
Quoted prices in active markets of identical assets/ liabilities
Inputs other than quoted prices that are observable (eg. Similar items)
Inputs not based on observable market data but reflecting market assumptions
(if you cannot find inputs)
o Current cost: entry value of replacing that asset with a new one. The cost of an asset
(liability) that would be paid (received) plus (minus) any transactions costs. Reflects
prices in the market in which the firm would acquire the asset or incur a liability
o Value in use (assets)/ fulfillment value (liabilities): present value of the cash flows that
an entity expects to derive from the use of an asset or to incur as it fulfils a liability.
Entity-specific values.
, *Eg. SBS buildings not meant for sale could use historical cost, use fair value for volatile assets that you
intend to sell. Choose valuation method depending on the asset.
Balance sheet should contain the following:
Assets Liabilities
(a) property, plant and equipment (k) trade and other payables
(b) investment property (l) provisions
(c) intangible assets (m) financial liabilities
(d) financial assets/instruments (n) current tax liabilities
(e) investments accounted for using the (o) deferred tax liabilities
equity method: when a company partially (p) liabilities included in disposal groups: a disposal
owns another company, value at (% group is a cluster of assets and liabilities that are
ownership * net income) intended to be sold off or disposed in a single
(f) biological assets transaction. They are not depreciated but are
(g) inventories measured at the lower of their carrying amount or
(h) trade and other receivables their fair value less costs to sell.
(i) cash and cash equivalents
(j) assets held for sale Capital
(k) current and deferred tax assets (q) non-controlling interests, presented within equity
(r) issued capital and reserves attributable to owners
of the parent
Additional lines/ heading/ subtotals are allowed if it improves the usefulness of the statement
(materiality)
Offsetting of elements (writing them off) is not allowed unless required or permitted by a
specific standard
Comparative information in respect of the previous period should be provided
Notes to financial statements (document with additional information)
Shares the basis of preparation of the statements and the specific accounting policies used
disclose any information required by IFRSs that is not presented elsewhere
provide additional information that is not presented elsewhere but is relevant to an
understanding of any of them
Going concern assumption: in preparing statements, we assume firms are a going concern and
will continue in operation for the foreseeable future. That's why you do accrual accounting over time.
Without going concern, value of assets may drop as you do a fire sale (eg. During liquidation)
PPE
Definition: tangible resources that are held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes and expected to be used during
more than 1 FY
Initial measurement
At cost: cost comprises all costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by the business.
Includes:
o Purchase price net of trade discounts
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