Your Business in a Nutshell the Statement of Financial Position Explained

11 Mar

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The Statement of Financial Position, often called the balance sheet, is one of the most important financial reports for any business. It provides a snapshot of a company's financial health at a specific date, showing what it owns (assets), what it owes (liabilities), and what belongs to the owners (equity).

For CIBA members working with small and medium-sized enterprises (SMEs), understanding Section 4 of the IFRS for SMEs is essential. This section of the standard explains what information must be included, how it should be presented, and what details should be disclosed in the notes.

This article will break down Section 4, helping you apply it when preparing financial statements for SMEs.

1. What Must Be Included in the Statement of Financial Position?

Every business needs to include certain key items in its Statement of Financial Position. These items are divided into three main categories:

(A) Assets – What the Business Owns

Assets are things of value that the business controls and can use to generate income. These can be:

Cash and cash equivalents – Money in the bank and petty cash.
Trade and other receivables – Money customers owe the business.
Financial assets – Investments that are not cash or trade receivables.
Inventories – Stock or goods that the business sells.
Property, plant, and equipment (PPE) – Buildings, machinery, and equipment used to run the business.
Investment property – Land or buildings owned for rental income or resale.
Intangible assets – Things that are valuable but not physical, like trademarks, patents, or goodwill.
Biological assets – Livestock or crops (for businesses in farming or forestry).
Investments in associates and joint ventures – When a business owns part of another company.

(B) Liabilities – What the Business Owes

Liabilities are debts or obligations the business must settle in the future. These include:

Trade and other payables – Money owed to suppliers and service providers.
Financial liabilities – Loans and borrowings.
Current tax liabilities – Taxes the business owes for the current year.
Deferred tax liabilities – Taxes that will be paid in future years.
Provisions – Money set aside for expected future costs, like legal claims or warranties.

(C) Equity – What Belongs to the Owners

Equity is the value left for the owners after all liabilities have been paid. It includes:

Share capital – Money invested in the business by shareholders.
Retained earnings – Profits kept in the business instead of being paid out as dividends.
Reserves – Special amounts set aside within equity for various purposes.
Non-controlling interest – Ownership in the business held by other investors who do not have full control.

2. Organising the Statement of Financial Position

The IFRS for SMEs allows businesses to present their financial position in two ways:

By separating current and non-current items (the most common approach).
By listing all items in order of liquidity (used when this provides clearer information).

Current vs Non-Current Classification

(A) Current Assets – Assets expected to be used, sold, or converted to cash within one year.
Examples:
✔ Cash
✔ Trade receivables (money owed by customers)
✔ Inventory (stock for sale)

(B) Non-Current Assets – Assets expected to be held for more than a year.
Examples:
✔ Buildings
✔ Machinery
✔ Trademarks

(C) Current Liabilities – Debts that must be settled within one year.
Examples:
✔ Trade payables (money owed to suppliers)
✔ Short-term loans
✔ Tax payable

(D) Non-Current Liabilities – Debts that will be paid after more than one year.
Examples:
✔ Long-term bank loans
✔ Lease obligations

In some industries, a liquidity-based format may be more useful. In this case, businesses list items from the most liquid (cash) to the least liquid (long-term investments).

3. Can Additional Line Items Be Added?

Yes! Businesses should add extra line items if they help make the financial position easier to understand.

For example, a retail company might want to separate inventory into raw materials, work-in-progress, and finished goods. Similarly, a business that provides services may need to list deferred revenue separately (money received in advance for work not yet done).

The key principle is clarity – businesses must ensure that the statement of financial position gives a clear and accurate picture of their financial health.

4. Extra Information That Must Be Disclosed

Some details do not need to be in the main statement but must be included in the notes. These include:

A breakdown of PPE – listing different types, like land, buildings, and vehicles.
A breakdown of receivables – showing how much is owed by related companies and how much by external customers.
Inventory details – separating stock into different categories.
Trade payables details – showing amounts owed to suppliers and related businesses.
Details of reserves within equity – explaining what each reserve is for.

If a company has share capital, it must also disclose:

The number of shares issued, and the number of shares authorised.
The par value per share, if applicable.
Any restrictions on dividends or the repayment of capital.

For businesses without share capital (such as partnerships), similar information must be disclosed about equity ownership and how it has changed during the year.

If the business is selling a major part of its assets, it must disclose:

A description of the assets being sold.
Why the sale is happening.
The value of the assets being sold.

5. What Does This Mean for CIBA Members?

For accountants and finance professionals working with SMEs, complying with IFRS for SMEs is essential. Following Section 4 ensures that:

✅ Financial reports give a true and fair view of the business.
✅ Stakeholders can easily understand the company’s financial position.
✅ The business meets international reporting standards, helping with credibility and financing.

CIBA members should encourage SMEs to:

✔ Keep financial statements simple and clear.
✔ Use the correct classifications for assets and liabilities.
✔ Disclose important details in the notes.

Final Thoughts

The Statement of Financial Position is a key financial statement that shows a business’s financial health at a specific date. Section 4 of the IFRS for SMEs Accounting Standard provides a structured approach for presenting assets, liabilities, and equity. By following these guidelines, SMEs can improve financial transparency, comply with international standards, and make better financial decisions. For CIBA members, understanding and applying these principles will help SMEs produce accurate, reliable, and professional financial statements that support business growth and investor confidence.

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