Definition of Statement of Financial Position
A statement of financial position sometimes referred to as a balance sheet, is a part of a financial statement that presents the position of assets, liabilities, and equity in an organization. It represents an undertaking’s financial position as on a particular day, being the last day of the reporting period. It provides an understanding of the financial health of the business on a particular date.
A set of financial statements is presented annually to the investors to provide them with information about the company’s financial results and financial position. One of the components of the financial statements is the statement of financial position. It contains details of the company’s assets, liabilities due by the company, and equity in the company. These items’ position is contained in the statement of financial position as of the end of the reporting period. It is necessarily prepared on an annual basis, but it can also be prepared on a half-yearly or quarterly basis.
This statement helps the stakeholders such as shareholders, government, and analysts understand the company’s financial health, and they can also compare the information with the prior period or with other companies operating in a similar industry.
Purpose of Statement of Financial Position
The purpose of the statement of financial position is to present true information about the company’s assets, liabilities, and equity. It helps to reveal the financial position of the company as at a particular date.
The information contained in the statement helps the investors and the other stakeholders for financial analysis based on which they make investment decisions. Further, investors can also compare the year-end statement of financial position with the past year’s statement to know how much deviation is there. This can give them an understanding of how the company is performing. The statement of the company can also be compared with those of other companies that are working in a similar industry to understand whether the company is better off than the others.
The statement is also useful for the management as it helps them track the company’s financial position and take measures for improvement.
Example of Statement of Financial Position (with Excel Template)
Let’s take an example to understand the Statement of Financial Position’s calculation in a better manner.
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Statement of Financial Position as At 31.12.2020
(Amounts expressed in thousands of currency units)
|Non Current Assets|
|Property, plant and equipment||350,700||360,020|
|Other intangible assets||227,470||227,470|
|Investments in associate||100,150||110,770|
|Investments in equity instruments||142,500||156,000|
|Total Current Assets||901,620||945,460|
|Other current assets||25,650||12,540|
|Cash and cash equivalents||312,400||322,900|
|Total Non-Current Assets||564,880||578,740|
|Equity & Liabilities|
|Equity attributable to owners of the parent:|
|Other components of equity||10,200||21,200|
|Equity attributable to owners of the parent||903,700||782,900|
|Non Current Liabilities|
|Total Non Current Liabilities||177,650||238,280|
|Trade and other payables||115,100||187,620|
|Current portion of long-term borrowings||10,000||20,000|
|Current tax payable||35,000||42,000|
|Total Current Liabilities||315,100||454,420|
|Total Equity and Liabilities||1,466,500||1,524,200|
The above illustration shows the statement is divided into different components (assets, liabilities, and equity) and line items. Also, the date is presented for the current year as well as the last year.
Components of Statement of Financial Position
There are three main components of a financial position statement, namely assets, liabilities, and equity.
These are the resources that are owned by the company and are acquired or generated with equity fund or outside borrowings. They are further divided into current and non-current assets based on whether they are expected to be realized within a period of twelve months from the reporting period or not. Examples of assets include inventory, property, trade receivables, financial assets, deferred tax asset, and so on.
Liabilities refer to the amounts owed by the company towards outside parties (i.e. amounts owned to parties other than shareholders in their capacity as a shareholder). The liabilities are also sub-classified as current and non-current liabilities based on whether they are expected to be settled within a period of twelve months from the reporting period or not. Some most commonly represented line items for liabilities include borrowings, provisions, trade payables, deferred tax liability, etc.
Equity represents the amount belonging to the shareholders of the company. This indicates the amount invested by the company’s shareholders and the amount that company owes to them. There are different components of equity, such as paid-up share capital, revenue reserves, capital reserves, etc.
Importance of Statement of Financial Position
It is a very important statement from the investors’ and management’s perspective. This is because the investors analyze the information in the statement to identify the company’s financial health and soundness. Stakeholders like investors and lending institutions also carry out ratio analysis using the statement of financial position to determine various financial parameters. Management uses the statement to identify and track the company’s financial position over a period of time.
Statement of Financial Position vs Balance Sheet
The term statement of financial position and balance sheet are used interchangeably. Both the statements present the financial position of an entity as at the end of the reporting period by presenting the position of assets, liabilities, and equity. International Financial Reporting Standards use the term Statement of Financial Position while the US GAAP uses the terminology Balance Sheet. There are some differences with respect to the presentation of line items as well in both the statements.
It offers the following advantages:
- It provides information about the financial position of the company.
- It helps in ratio analysis.
- The statement of a current period can be compared with the last year’s statement to track the company’s performance.
- Investors get information about the company’s financial health, and based on this statement, they can make their investment decisions.
- It also helps determine the company’s liquidity by providing data about the current assets available with the company for settling its current liabilities.
It forms part of an organisation’s financial statements and provides useful insight to the users about the company’s financial health. The statement is to be prepared as per the accounting standards applicable to the company based on their jurisdiction.
This is a guide to the Statement of Financial Position. Here we also discuss the definition and components of statement of financial position along with advantages and example. You may also have a look at the following articles to learn more –
- Components of Financial Statements
- Types of Financial Statements
- Users of Financial Statements
- Objectives of Financial Statements