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  • [MUSIC PLAYING]

  • Hi.

  • [INAUDIBLE] here.

  • And in this video, we'll be exploring

  • the Statement of Financial Position under IFRS.

  • Before we move forward, though, let's review.

  • Public corporations in Canada use IFRS, International

  • Financial Reporting Standards.

  • IFRS requires them to produce five statements-- the Income

  • Statement, Statement of Comprehensive Income,

  • Statement of Changes in Equity, Statement

  • of Financial Position, and Statement of Cash Flows.

  • Today we'll focus on the Statement of Financial

  • Position, but let's review the previous statements

  • and the interconnection.

  • The first financial statement produced

  • is the Income Statement.

  • This statement measures a company's performance.

  • The profit or loss from the Income Statement

  • is used in multiple other statements.

  • But right now, let's focus on the fact

  • that the profit or loss is carried forward

  • to the Statement of Comprehensive Income.

  • This statement adds or deducts unrealized gains or losses

  • to provide a broader definition of a company's performance, one

  • that includes both realized and unrealized amounts.

  • The unrealized gains or losses on the Statement

  • of Comprehensive Income are then carried forward

  • to the Statement of Changes in Equity.

  • This statement reports how profits, dividends, shares,

  • and other items have affected shareholders' equity.

  • Remember I said that the profit or loss from the Income

  • Statement is used in multiple other statements?

  • You saw that it was used as the opening number in the Statement

  • of Comprehensive Income.

  • Here, it's used in the Retained Earnings column.

  • The ending balances from the Statement of Changes in Equity

  • are then transferred to the Statement of Financial

  • Position, the subject of this video.

  • The Statement of Financial Position

  • summarizes the assets owned, the liabilities owed,

  • and the equity investment by the shareholders.

  • This statement shows the financial health

  • of a company at a specific point in time.

  • In order to understand the Statement of Financial

  • Position, we have to first understand

  • the elements that make up this statement-- assets,

  • liabilities, and equity.

  • Let's look at each individually.

  • Everything that a company owns or controls

  • is considered an asset, a resource the company will

  • use in the future.

  • When you look at the assets, you answer the question,

  • what does the company have that they will use in the future

  • to help run the business?

  • Assets are divided into two categories--

  • current and non-current or long-term.

  • Why?

  • Financial statements are all about communicating

  • useful information to decision-makers

  • by grouping assets based on their characteristics,

  • in this case how fast they are used or converted into cash.

  • Users obtain a better understanding of the company's

  • financial position and health.

  • Let's define those two categories of assets.

  • Current assets are any assets that

  • will be converted into cash, sold,

  • or consumed within one year or operating cycle,

  • whichever is longer.

  • A few of the more common accounts

  • found in this grouping our things

  • like cash and prepaid expenses.

  • Non-current assets are any assets

  • that do not meet the definition of a current asset.

  • These are resources that will be converted into cash,

  • sold, or used up over more than one year.

  • They're divided into five subcategories--

  • long-term investments; property, plant, and equipment;

  • intangible assets; goodwill; and other assets.

  • In order to better understand the accounts that

  • go into current and non-current assets,

  • I suggest you check out the Financial Statement Element

  • video which lists, defines, and describes

  • all the different accounts under each category.

  • How do companies get their assets?

  • They use liabilities.

  • Companies take on debt and owe third parties either money,

  • goods, or services.

  • Like assets, liabilities are divided

  • into current and non-current, again to provide information

  • to users so they can make decisions.

  • Current liabilities are obligations

  • that will be satisfied in one year or operating cycle,

  • whichever is longer.

  • Current liabilities include accounts such as accounts

  • payable and unearned revenue.

  • Non-current, or long-term liabilities,

  • are debts that will be satisfied beyond one year or operating

  • cycle, whichever is longer.

  • Accounts included in this subcategory

  • almost always have the word payable as part of the account

  • name.

  • Again, to learn more, check out the Financial Statement

  • Elements video which lists, defines,

  • and describes all the different accounts under each category.

  • We already defined the element equity

  • when you completed the Statement of Changes in Equity.

  • Equity is the financing by owners.

  • Recall that it's made up of share capital,

  • retained earnings, and accumulated

  • other comprehensive income.

  • It answers the question, what part of the business

  • is financed by the owners?

  • Let's just review the three items quickly.

  • Share capital represents the amount received in exchange

  • for company's shares.

  • This is a direct investment by the shareholders

  • because shareholders choose to invest in the company

  • by buying shares.

  • Next, the indirect investment called retained earnings.

  • Retained earnings is increased by profit

  • and decreased by dividends paid out

  • to shareholders, as well as losses

  • from the Income Statement.

  • The profit is kept in the business

  • to help them grow in the future.

  • Finally, accumulated other comprehensive income.

  • This is the total of all unrealized gains and losses

  • from the Statement of Comprehensive Income

  • since the company began.

  • This amount is increased by unrealized gains

  • and decreased by unrealized losses.

  • Let's do a quick check of your understanding so far.

  • The right to receive money in the future from a customer

  • is an.

  • Asset called accounts receivable.

  • It is an asset because it will be converted

  • into cash in the future, and it has future economic benefit

  • for the company because it brings in cash.

  • Now that we understand the elements that make up

  • the Statement of Financial Position,

  • we can look at an example.

  • Note that the statement is so large

  • that I've divided it into sections so

  • that you can see them better.

  • As always, the statement starts with the heading,

  • which must include the company name and the title

  • of the financial statement.

  • One change from previous statements-- the Statement

  • of Financial Position is at a point in time,

  • not a period of time.

  • Why?

  • Because every time a company has another transaction,

  • their financial position changes.

  • For example, if you have $10 in your pocket

  • and then you buy a Timmy's, your financial position has changed.

  • That's why the Statement of Financial Position

  • is a snapshot, one second in time.

  • The title of the statement reflects that.

  • In this demonstration video, I've

  • followed the common North American

  • practice of listing current items before non-current items.

  • This is called order of liquidity.

  • The order is current assets before

  • non-current and current liabilities

  • before non-current liabilities.

  • Although I have set up the statement in columns

  • for easy viewing, the accounts can all

  • be listed in one column and the amounts in another.

  • Here you see the details of the Current Asset section.

  • Notice that the assets are listed in order of liquidity.

  • The faster I convert them into cash, sell, or use them,

  • the higher they are on the list.

  • Note that there is a subtotal called total current assets.

  • The next section is the Non-current Assets.

  • I have listed them from long-term investment

  • to goodwill.

  • Notice, if there is only one item in the section,

  • there is no subtotal necessary.

  • Intangibles and goodwill are examples of this.

  • If there are more than one item listed under a heading,

  • as there is for long-term investments and property,

  • plant, and equipment, there must be a subtotal.

  • The next section is called Liabilities

  • and Shareholders' Equity.

  • I've started with current liabilities

  • and provided a subtotal before moving on

  • to non-current liabilities.

  • Note, each section has its own subtotal,

  • and then total liabilities is provided at the bottom.

  • The accounts within current and non-current liabilities

  • are an order of when they will be settled.

  • The earlier they're settled, the higher they are on the listing.

  • The final section is Shareholders' Equity.

  • Notice that the order of shareholders' equity items--

  • common shares, retained earnings, and accumulated

  • other comprehensive income--

  • are the same as the order of the columns in the Statement

  • of Changes in Equity.

  • There is a subtotal for shareholders' equity

  • before total liabilities and shareholders' equity

  • is provided.

  • Notice something really important.

  • Total assets are equal to total liabilities

  • plus shareholders' equity.

  • This is called the accounting equation.

  • This equation shows that economic resources--

  • that's our assets-- are financed either through debt

  • or liabilities or equity from shareholders.

  • This equation will be explored in a later video.

  • For now, it's important to recognize

  • that in the Statement of Financial

  • Position assets always equals liabilities

  • plus shareholders' equity.

  • Let's check your understanding.

  • Shareholders' equity is always placed

  • after liabilities on the Statement of Financial Position

  • under IFRS.

  • You likely said true, but the correct answer

  • is actually false.

  • IFRS allows choice with regards to the order of the categories

  • on the Statement of Financial Position.

  • It's common in North America to use

  • order of liquidity, which is what

  • I've used in the statements I demonstrated.

  • More common for international and European corporations

  • is reverse liquidity order.

  • On these statements, non-current assets

  • are listed first, then current assets.

  • In addition, shareholders' equity is actually

  • listed before liabilities, and liabilities

  • are in reverse order, meaning that it's

  • non-current liabilities before current liabilities.

  • Within each category, the accounts

  • are also listed in reverse order.

  • That means that under current assets

  • cash would be last, not first.

  • It's important to understand that IFRS provides choice.

  • But for purposes of these videos,

  • we'll continue to use order of liquidity,

  • which is most common in North American companies.

  • So what questions does the Statement of Financial Position

  • answer?

  • For investors, it shows that the company

  • can repay its current and non-current debt

  • as they come due.

  • For creditors, it indicates if there's

  • enough assets to operate.

  • If they can't operate, is there enough assets

  • to cover outstanding debts when they're sold?

  • Does the company have enough cash

  • to pay its debts as they come due?

  • Considering current debt levels, should we lend them more money?

  • For both investors and lenders, it

  • answers the question, what does the company use, debt or equity

  • financing?

  • The Statement of Financial Position

  • is not the last financial statement

  • we're going to complete.