Balance Sheet
by Binam Ghimire
1
Learning Objectives
1.
2.
3.
4.
5.
The Finance Decision
The Investment Decision
The Recognition of Items in the Balance Sheet
IAS1 Presentation of The Balance Sheet
Analysis of the Financial Position
Introduction
 Two important decisions in Business are:
The Financing Decision and
The Investment Decision
 What are these ?
The Finance Decision
 The Type and Amount of Finance to raise.
Long Term Finance
Equity, e.g.
• Ordinary
• Preferred
Debt, e.g.
• Bonds
• Loans
Short Term Finance (repayable within 1 year)
Bank Overdraft
Trade Creditors/Accounts Payable
 Organisations raise finance to fund investment
The Investment Decision
 Which Assets to buy
Long Term (Non Current Assets)
Land & Buildings
Equipment
Etc
Short Term (Current Assets)
Inventory
Bank
Cash
The Balance Sheet
 The Balance Sheet brings the Finance & Investment
Decisions together to present a Statement of the
Financial Position as at a certain date.
 Let’s start by looking at a very simple example…
Balance Sheet of F Clothes UK as at 31st December 20xx.
Non Current Assets
Land & Buildings
500,000
Fixtures
Current Assets
Inventory
75,000
Accounts Rec 120,000
Bank
358,000
100,000 Capital
20,000 + Net Profit
3,000
120,000
503,000
Non Current Liabilities
Bank Loan
30,000
Current Liabilities
10,000
Accounts Payable
488,000
608,000
608,000
Investment Decisions
Non Current Assets
+
Current Assets
=
Finance Decisions
Equity
+
Non Current Liabilities
+
Current Liabilities
Balance Sheet of F Clothes UK as at 31st December 20xx.
Non Current Assets
Land & Buildings
500,000
Fixtures
Current Assets
Inventory
75,000
Accounts Rec 120,000
Bank
358,000
100,000 Capital
20,000 + Net Profit
3,000
120,000
503,000
Non Current Liabilities
Bank Loan
30,000
Current Liabilities
10,000
Accounts Payable
488,000
608,000
608,000
What does this tell you about the Finance & Investment Decisions
?
Balance Sheet Definitions
 Asset.
An asset is a resource controlled by the enterprise as a
result of past events and from which future economic
benefits are expected to flow to the enterprise.
 Liability.
A liability is a present obligation of the enterprise
arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of
resources embodying economic benefits.
What about Off Balance Sheet Finance?
 Equity.
Equity is the residual interest in the assets of the
enterprise after deducting all its liabilities.
Recognition of the Elements of Financial
Statements
 Recognition is the process of incorporating in the balance sheet (or
income statement) an item that meets the definition of an element
and satisfies the following criteria for recognition:
 An asset
when it is probable that the future economic benefits will
flow to the enterprise and the asset has a cost or value that
can be measured reliably.
 A liability
when it is probable that an outflow of resources embodying
economic benefits will result from the settlement of a
present obligation and the amount at which the settlement
will take place can be measured reliably.
 What about the value of your brands (goodwill) ?
IAS 1 Presentation of Financial Statements
The Balance Sheet
 An entity must present a classified balance sheet,
separating the following, unless it is based on liquidity
which is deemed more reliable and more relevant, e.g.
Financial Institutions:
Current assets
Non-Current assets
Current liabilities
Non-Current liabilities
Balance Sheet of F Clothes UK as at 31st December 20xx.
Non Current Assets
Land & Buildings
500,000
Fixtures
Current Assets
Inventory
75,000
Accounts Rec 120,000
Bank
358,000
100,000 Capital
20,000 + Net Profit
3,000
120,000
503,000
Non Current Liabilities
Bank Loan
30,000
Current Liabilities
10,000
Accounts Payable
488,000
608,000
How would a Financial Institution differ ?
608,000
 Current assets
cash;
cash equivalent;
assets held for collection, sale, or consumption within the
enterprise's normal operating cycle; or
assets held for trading within the next 12 months.
 Non- Current assets
All other assets are non-current
 Current liabilities
Are those to be settled within the enterprise's normal
operating cycle or due within 12 months, or those held for
trading, or those for which the entity does not have an
unconditional right to defer payment beyond 12 months.
 Non- Current liabilities
Other liabilities are non-current.
Minimum Balance
Sheet Items

















a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
property, plant and equipment;
investment property;
intangible assets;
financial assets (excluding amounts shown under (e), (h) and (i));
investments accounted for using the equity method;
biological assets;
inventories;
trade and other receivables;
cash and cash equivalents;
trade and other payables;
provisions;
financial liabilities (excluding amounts shown under (j) and (k));
liabilities and assets for current tax, as defined in IAS 12;
deferred tax liabilities and deferred tax assets, as defined in IAS 12;
minority interest, presented within equity; and
issued capital and reserves attributable to equity holders of the parent.
Additional line items may be needed to fairly present the entity's financial position.
Issued Share Capital
and Reserves
 The following disclosures are required:
 numbers of shares authorised, issued and fully paid, and issued
but not fully paid
 par value
 reconciliation of shares outstanding at the beginning and the
end of the period
 description of rights, preferences, and restrictions
 treasury shares, including shares held by subsidiaries and
associates
 shares reserved for issuance under options and contracts
 a description of the nature and purpose of each reserve within
owners' equity
Balance Sheet Format
 IAS 1 does NOT prescribe the format of the balance sheet.
 Assets can be presented current then non-current, or vice
versa.
 Liabilities and equity can be presented current then noncurrent then equity, or vice versa.
 A net asset presentation (assets minus liabilities) is
allowed.
 The long-term financing approach used in UK and
elsewhere – fixed assets + current assets - short term
payables = long-term debt plus equity – is also
acceptable.
Alternative Presentations
Non Current Assets
Current Assets
100
80
Equity
Non Current Liabilities
Current Liabilities
180
Non Current Assets
Current Assets
Less Current Liabilities
Net Current Assets
Less Non Current Liabilities
Net Assets
Equity
100
80
10
70
170
20
150
150
150
20
10
180
Example
 Let’s examine Exhibit 2.2
 What does it show ?
Company Value
 Let us examine two other companies
BP (an Oil Company) &
Tesco (a Supermarket)
 Have a look at their Balance Sheet’s,
BP as at 31st December 2010 &
Tesco as at 26th February 2011.
 What is the value of each company ?
BP Group
Balance Sheet Extract
31st December
Net assets
Equity Share capital
Reserves
BP shareholders’ equity
Minority interest
Total equity
2010 $M
95,891
5,183
89,804
94,987
904
95,891
2009 $M
102,113
5,179
96,434
101,613
500
102,113
Tesco Plc
Balance Sheet Extract
26th February 2011
£M
Net assets
Equity
Share capital
Share premium account
Other reserves
Retained earnings
Equity attributable to owners
Non-controlling interests
Total Equity
14,681
2011 £M
16,623
2009
14,681
402
399
4,896
4,801
40
40
11,197
9,356
16,535
14,596
88
85
16,623
Market Value
 On 26th February the Market Value of Tesco Plc
(Market Capitalisation) was £32.20 bn
 The Book Value as shown above as at that date was
only £ 16.62 bn
 Why the difference ?
Book Value
 The Book Value as measured by the Balance Sheet is the Net Assets:
Total Assets (Non Current + Current)
less
Total Liabilities (Non Current + Current)
 But Tesco, like most businesses is worth more than that.
 If you were the owner you would own the Net Assets and all the
Future Earnings (or losses). Clearly these are not part of the Book
Value.
 Whether the future earnings are accurately captured by the market is
another matter !
 Can you think of any other reason why Book Value and
Market Value may be different ?
Net Current Assets
Before leaving Tesco and the Balance Sheet, what do
we mean by Net Current Assets ?
Current Assets
less
Current Liabilities
In Tesco’s case it was:
Current Assets
less
£11,869 M
less
Current Liabilities
£ 17,731 M =
This is also known as Working Capital
Do you feel it is adequate ?
(£5,862M)
Summary
 The Balance Sheet brings the Finance & Investment
Decisions together to present a Statement of the Financial
Position as at a certain date.
 The Book Value as measured by the Balance Sheet is the
Net Assets:
Total Assets (Non Current + Current)
less
Total Liabilities (Non Current + Current)
 The Market Value may well differ from the Book Value as,
amongst other things, the market seeks to capture the
value of Future Earnings