The International Financial Reporting Standards (IFRS) provide detailed guidelines on how entities should present their financial position through balance sheets . One of the key aspects of this presentation is the classification of assets and liabilities into current and non-current categories. This distinction offers valuable insights into an entity’s liquidity, financial flexibility, and long-term solvency.

These guidelines are specifically set out in IAS 1 – Presentation of Financial Statements, which outlines the general structure, classification, and minimum disclosure requirements for assets and liabilities on the balance sheet. The standard ensures that users of financial statements have the information necessary to assess the company’s financial position, including its liquidity and solvency.

1. Definition of Assets and Liabilities

• Assets are resources controlled by the entity as a result of past events, from which future economic benefits are expected to flow to the entity.
• Liabilities are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.

2. Current vs. Non-Current Classification

In IAS 1, assets and liabilities are classified into current and non-current categories based on an identifiable operating cycle.

A. Current Assets

Current assets are those that are expected to be realized or consumed within the entity’s normal operating cycle or within 12 months of the reporting period, whichever is longer.

Criteria for Current Assets:

• Expected to be realized in, or intended for sale or consumption during, the entity’s normal operating cycle.
• Held primarily for the purpose of trading.
• Expected to be realized within 12 months from the reporting date.
• Consist of cash or cash equivalents unless restricted from being used to settle a liability for at least 12 months after the reporting date.

Examples of Current Assets:

• Inventories: Goods held for sale or consumption in the normal course of business.
• Trade receivables: Amounts due from customers for goods or services provided.
• Cash and cash equivalents: Cash in hand and short-term, highly liquid investments.

B. Non-Current Assets

Non-current assets are those that are expected to be realized or consumed beyond the entity’s normal operating cycle or more than 12 months after the reporting period.

Examples of Non-Current Assets:

• Property, plant, and equipment (PPE): Long-term assets used in operations.
• Intangible assets: Non-physical assets like patents, trademarks, and goodwill.
• Long-term investments: Investments in stocks, bonds, or other financial instruments that are expected to be held for a period exceeding 12 months.

C. Current Liabilities

Current liabilities are obligations that the entity expects to settle within its normal operating cycle or within 12 months from the reporting date.

Criteria for Current Liabilities:

• Expected to be settled within the entity’s normal operating cycle.
• Held primarily for the purpose of being traded.
• Due to be settled within 12 months after the reporting date.
• The entity does not have an unconditional right to defer settlement for at least 12 months after the reporting date.

Examples of Current Liabilities:

• Trade payables: Amounts owed to suppliers for goods or services received.
• Short-term borrowings: Loans or other financing arrangements due within 12 months.
• Current portion of long-term debt: The part of long-term debt that is due within the next 12 months.
• Accrued expenses: Liabilities for expenses incurred but not yet paid.

D. Non-Current Liabilities

Non-current liabilities are obligations that the entity expects to settle beyond 12 months from the reporting date.

Examples of Non-Current Liabilities:

• Long-term borrowings: Debt or financing arrangements due after 12 months.
• Deferred tax liabilities: Tax obligations that are deferred to future periods.
• Pension obligations: Long-term obligations to employees under pension plans.

3. Presentation on the Statement of Financial Position

Under IAS 1, an entity may present its assets and liabilities:

• In a classified balance sheet, where current and non-current assets and liabilities are presented separately.
• In an unclassified balance sheet, where no distinction is made, although the classified format is generally preferred.

4. Operating Cycle and Impact on Classification

The operating cycle is a critical factor in determining whether an asset or liability is current or non-current. The operating cycle is the period between the acquisition of inventory and its realization as cash. Entities with a longer operating cycle (e.g., construction companies) may classify certain assets and liabilities as current even though their realization or settlement exceeds 12 months, as long as they are tied to the operating cycle.

5. Reclassification of Assets and Liabilities

IAS 1 requires reclassification of assets and liabilities if their status changes (e.g., a long-term loan that becomes due within 12 months). This reclassification ensures that the financial statements reflect the true financial position of the entity at the reporting date.