Acca f3 Financial Accounting (int) Study Text

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21: Preparation of financial statements for companies   Part F  Preparing basic financial statements 

4 The current/non-current distinction 

You should be aware of the issues surrounding the current/non-current distinction as well as the 

disclosure requirements laid down in IAS 1. 

Current assets and current liabilities of various types have been discussed in earlier parts of this Study 

Text. Users of financial statements need to be able to identify current assets and current liabilities

in order to determine the company's financial position. Where current assets are greater than current 

liabilities, the net excess is often called 'working capital' or 'net current assets'. 

4.1 Alternative views of current assets and current liabilities 

IAS 1 lays down rules for entities which choose to show the current/non-current distinction. It also states 

what should happen if they do not do so. 

Each entity should decide whether it wishes to present current/non-current assets and current/non-current 

liabilities as 

separate classifications in the statement of financial position. This decision should be based 

on the nature of the entity's options. Where an entity does not choose to make this classification, it should 

present assets and liabilities broadly 

in order of their liquidity.

In either case, the entity should disclose any portion of an asset or liability which is expected to be 

recovered or settled 

after more than twelve months. For example, for an amount receivable which is due 

in instalments over 18 months, the portion due after more than twelve months must be disclosed. 

4.2 Current assets 

An asset should be classified as a 

current asset when it: 

 

is expected to be realised in, or is held for sale or consumption in, the entity's normal operating cycle; or 

 

is held primarily for the purpose of being traded 

 

is expected to be realised within twelve months after the reporting date 

 

is cash or a cash equivalent which is not restricted in its use. 

All other assets should be classified as non-current assets. 

(IAS 1) 

Non-current includes tangible, intangible operating and financial assets of a long-term nature. Other terms 

with the same meaning can be used (eg 'fixed', 'long-term'). 

The term 'operating cycle' is defined by the standard as follows. 

The

operating cycle of an entity is the time between the acquisition of assets for processing and their 

realisation in cash or cash equivalents. 

(IAS 1) 

Current assets therefore include assets (such as inventories and trade receivables) that are sold, or 

realised as part of the normal operating cycle. 

This is the case even where they are not expected to be 

realised within twelve months.

4.3 Current liabilities 

A liability should be classified as a 

current liability when it: 

 

is expected to be settled in the entity's normal operating cycle; or 

 

is due to be settled within twelve months of the reporting date 

 

is held primarily for the purpose of being traded. 

All other liabilities should be classified as non-current liabilities.  (IAS 1) 

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Part F  Preparing basic financial statements

  21:  Preparation of basic financial statements for companies

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The categorisation of current liabilities is very similar to that of current assets. Thus, some current 

liabilities are part of the 

working capital used in the normal operating cycle of the business (ie trade 

payables and accruals for employee and other operating costs). Such items will be classed as current 

liabilities

even where they are due to be settled more than twelve months after the reporting date. 

There are also current liabilities which are not settled as part of the normal operating cycle, but which are 

due to be settled within twelve months of the reporting date. These include bank overdrafts, income taxes, 

other non-trade payables and the current portion of interest-bearing liabilities. Any interest-bearing 

liabilities that are used to finance working capital on a long-term basis, and that are not due for settlement 

within twelve months, should be classed as 

non-current liabilities.

For the differences between liabilities and provisions, see 

Chapter 13

 of this Study Text. 

5 Company accounts for internal purposes 

The large amount of information in this chapter so far has really been geared towards the financial 

statements companies produce for external reporting purposes. In particular, the IFRSs discussed here 

are all concerned with external disclosure. 

Companies do produce financial accounts for internal 

purposes, however.

It will often be the case that internal use financial accounts look very similar to those produced for external 

reporting for various reasons. 

(a) 

The information required by internal users is similar to that required by external users. Any 

additional information for managers is usually provided by 

management accounts.

(b) 

Financial accounts produced for internal purposes can be used for external reporting with very little 

further adjustment. 

It remains true, nevertheless, that 

financial accounts for internal use can follow whichever format 

managers wish. They may be more detailed in some areas than external financial accounts (perhaps 

giving breakdown of sales and profits by region or by product), but may also exclude some items, for 

example the taxation charge and dividend may be missed out of the income statement.

You should always read question requirements carefully to discover whether you are being asked to 

produce accounts for external or internal purposes. Even when producing the latter, however, it is a good 

idea to stick to the external statement formats as these show best practice. 

Now try this exercise.

Question

Internal accounts 

The accountant of Zabit Co has prepared the following trial  balance as at 31 December 20X7. 

$'000

50c ordinary shares (fully paid) 

350

7% $1 preference shares (fully paid) 

100

10% loan stock (secured) 

200

Retained earnings 1.1.X7 

242

General reserve 1.1.X7 

171

Land and buildings 1.1.X7 (cost) 

430

Plant and machinery 1.1.X7 (cost) 

830

Accumulated depreciation 

 Buildings 

1.1.X7 

20

  Plant and machinery 1.1.X7 

222

Inventory 1.1.X7 

190

Sales

2,695

Purchases

2,152

Preference dividend 

7

Ordinary dividend (interim) 

8

Loan interest 

10

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