174 Accounting: Business Reporting for Decision Making
Accounting standards exist that prescribe the presentation and disclosure requirements for financial
statements. In this section, we will explore some of the key presentation and disclosure requirements
applicable to the balance sheet. Recall that all listed entities such as the Qantas Group and JB Hi-Fi Ltd,
are required to comply with the presentation and disclosure requirements of the accounting standards.
Small entities with no public accountability, such as ATC, are not required to comply with accounting
standards. This means that they are unconstrained in the preparation of their financial statements. A
small business operation such as ATC would not have raised equity or debt capital from the public and
would not have investors and shareholders who depend on financial statements to monitor and assess
their investment decisions. Some entities with no public accountability voluntarily adopt presentation
and disclosure practices required by accounting standards.
Current and non-current assets and liabilities
When preparing a balance sheet, assets and liabilities should be presented in a current/non-current format
unless an alternative presentation, such as listing the assets and liabilities in order of their liquidity,
provides information that is more relevant and reliable. The distinction between current assets and
non-current assets is based on the timing of the future economic benefits. Similarly, the distinction
between current liabilities and non-current liabilities is based on the timing of the expected future
sacrifices. If the economic benefits (outflow of resources) attached to the asset (liability) are expected
to be realised within the next reporting period (assumed to be 12 months), then the asset (liability) is
categorised as current. However, if the economic benefits (outflow of resources) attached to the asset
(liability) are expected over a period extending beyond the next reporting period, a non-current categ-
orisation is appropriate.
Grouping the assets and liabilities on a current/non-current basis is useful when assessing an entity’s
liquidity. Comparing the current assets and current liabilities is useful in assessing the likelihood that the
entity will be able to pay its debts as they fall due. If an entity has a single, clearly identifiable time lapse
between the purchase of assets for processing and the realisation of their economic benefits (referred to
as the operating cycle) that extends beyond 12 months, then the length of the operating cycle can be
used to categorise assets and liabilities as current or non-current.
To illustrate the current/non-current classification concept, consider an entity that has inventory avail-
able for sale. The inventory would be categorised as a current asset, as the entity would expect to sell
the inventory and receive the cash within the next 12-month period. In contrast, the entity’s machinery
used to produce the inventory will generate economic benefits beyond the next reporting period and,
accordingly, would be categorised as a non-current asset. If an entity secures a term loan in 2015, with
the loan maturing in 2025, the portion of the loan that is to be repaid within the next 12 months would be
classified as a current liability, whereas the loan payments beyond the next 12 months would be classi-
fied as a non-current liability.
On the balance sheet, it is usual for an entity to show the total amounts for:
- current assets
- non-current assets
- current liabilities
- non-current liabilities.
Presentation and disclosure of assets,
liabilities and equity
On the balance sheet, assets are classified according to their nature or function. This means that the asset
classifications can reflect an asset’s:
- liquidity
- marketability