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Statement of Financial Position (US GAAP) – An overview June 17, 2012

Posted by prodigalman in US GAAP.
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Statement of Financial Position is basically what we commonly know as a Balance Sheet. It’s a term coined under US GAAP probably to emphasize more accurately that; at this point in time, the said entity has its financial position as stated. From an Indian accountant’s perspective though, the good news is most of the concepts are the same.

However here are some noteworthy points:

  • No defined format for Statement of Financial Position: In terms of presentation nowhere in US GAAP do we have any defined/prescribed format. What do we have then? Industry best practices have resulted in a few acceptable formats; Horizontal (similar to what we had in the old Schedule VI to the Companies Act in India, just the Assets here are on the left and the liabilities are on right, plus the order from Fixed Assets to Current Assets is flipped upside down, probably because they drive left-handed, and talk upside down… err….kidding!), the other being the Vertical format (Again Current Assets are at the top flowing down till the Fixed Assets.)
  • Disclosure as Current and Non Current based on the Operating Cycle: Current would generally be anything that would be realized  within a year. However in some industries, due to the operating cycle being longer than a year, the Assets/Liabilities would be classified as current/non current based on the operating cycle, subject to the operating cycle not being very long, such that the usefulness of the classification diminishes. E.g. in the case of an Investment Company, or a Real Estate company, working capital has little importance, hence classification as current/non current is not relevant, and thus avoided. Departure from Revised Schedule VI; in India, the Balance Sheets of all companies need to be classified as Current/Non Current.
  • Valuation Allowance: One separate, single line item reflecting Provision for uncollectibles (Bad Debts), Premiums/Discounts on issue of Debt Securities, etc.
  • Investment classification as Held to Maturity/Available for sale:  This is not necessarily done on the face of the SOFP, but would then need to be disclosed separately on the Notes to Accounts.
  • Restricted Cash: Not all Cash (including Cash at bank) would be current assets. The amounts that have restrictions to their withdrawal, e.g. Certificates of Deposit, would not be included in cash. Further, cash earmarked to be spent on non current assets, [e.g. for the purchase of Property, Plant and Equipment aka PPE (apna Plant and Machinery)], would not be classified as current.
  • Assets under Capital Lease to be disclosed separately on the Notes to Accounts.
  • Other Assets: Residual head under Assets.
  • Offsetting Tax Liability with certain assets: There is a concept of Tax Anticipation Notes. These notes are issued by US Governmental Bodies to facilitate advance collection of taxes. Hence any such asset can set off the related tax liability, with the entity presenting only the net liability on the SOFP.
  • Retained Earnings: Same as Reserves and Surplus in India.
  • Accumulated Other Comprehensive Income (OCI): It represents the change in Equity as a result of transactions arising from sources other than net income. It mostly is made up of Changes to Pension Liability, Foreign Exchange Gains/losses (unlike in India, where AS11 requires it to be charged to P&L, also refer the Notification by the Govt, relevant for Companies) and Unrealized Holding Gains/Losses on Investments.
  • Treasury Stock: This is the repurchase by a Company of its own shares. Some of the key points in this regard are; a) No dividend is paid out on the such Treasury Stock, b) The said shares have no voting rights.
  • Capital Stock: This is the par/stated value of shares issued by a company.

Sample presentation on an SOFP:

Common Stock, $10 par value, xxx shares authorized, xxx shares issued and outstanding

  • Additional Paid-in Capital (APIC): This represents the excess over par/stated value caused by:

                            1. Actual issue price being in excess of par/stated value of shares.

                            2. Paid-in capital from transactions other than regular issue viz. Treasury Stock, Stock Dividends, etc.

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