operating cycle of the business.
Subtopics
ASC 210, Balance Sheet, is divided into two Subtopics:
ASC 210‐10, Overall, which focuses on the presentation of the balance sheet, particularly the operating cycle and the classification of current assets and liabilities, and
ASC 210‐20, Offsetting, which offers guidance on offsetting amounts for certain contracts and repurchase agreements accounted for as collateralized borrowings and reverse repurchase agreements accounted for as collateralized borrowings.
Scope and Scope Exceptions
ASC 210‐10 The guidance in ASC 210‐10 applies to all entities. However, the guidance related to classification of current assets and current liabilities does not apply if the entity does not present a classified balance sheet.
ASC 210‐20 The guidance in ASC 210‐20 does not apply to:
The derecognition or nonrecognition of assets and liabilities. Derecognition by sale of an asset or extinguishment of a liability results in removal of a recognized asset or liability and generally results in the recognition of gain or loss. Although conceptually different, offsetting that results in a net amount of zero and derecognition with no gain or loss are indistinguishable in their effects on the statement of financial position. Likewise, not recognizing assets and liabilities of the same amount in financial statements achieves similar reported results. (ASC 210‐10‐15‐2)
Generally, right of setoff involves only two parties. Exceptions to this two‐party principle are limited to the guidance in these Subtopics and paragraphs:
ASC 840‐30, paragraphs 32 through 52 (leveraged leases).
Upon implementation of ASU 2016‐02, Leases—ASC 842‐50 (leveraged leases).
ASC 715‐30 (accounting for pension plan assets and liabilities).
ASC 715‐60 (accounting for plan assets and liabilities).
ASC 740‐10 (net tax asset or liability amounts reported).
ASC 815, paragraphs 815‐10‐45‐1 through 45‐7 (derivative instruments with the right to reclaim cash collateral or the obligation to return cash collateral).
ASC 940‐320 (trade date accounting for trading portfolio positions) and 910‐405 (advances received on construction contracts).
ASC 942‐210‐45‐3A.(ASC 210‐20‐15‐3)
PRACTICE ALERT
Financial statement classification is a frequent topic of SEC comment letters. While SEC rules only apply to public entities, preparers of financial statements can benefit from the findings of SEC reviewers. The classifications of current and noncurrent assets and liabilities, including debt, have been a source of SEC staff comments. Preparers should look to the guidance in ASC 210‐10‐45 and the discussion in this chapter when preparing classified balance sheets to determine whether an item should be classified as current or noncurrent.
Another item that appears in SEC comments relates to the disaggregation of assets and liabilities. The SEC requires disclosure on the face of the financial statements or in the notes items in excess of 5% of total assets and total liabilities, respectively. Again, this is not required for non‐SEC filers, but may be a benchmark for preparers to consider when deciding which items to disaggregate.
DISCLOSURE AND PRESENTATION REQUIREMENTS
ASC 210‐10, Overall
Presenting one year of financial statements is acceptable under GAAP, but two years for nonpublic companies is desirable. It is common for the statement of financial position to be divided into classifications based on the length of the entity's operating cycle. Assets, liabilities, and shareholders' equity are separated in the statement of financial position so that important relationships can be shown and attention can be focused on significant subtotals. It is common for reporting entities to present the items in the order of liquidity.
Assets
Current Assets Current assets are cash and other assets that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business (ASC 210‐10‐05‐4). When the normal operating cycle is less than one year, a one‐year period is used to distinguish current assets from noncurrent assets. When the operating cycle exceeds one year, the operating cycle will serve as the proper period for purposes of current asset classification. (ASC 210‐10‐45‐3) When the operating cycle is very long, the usefulness of the concept of current assets diminishes. The following items are classified as current assets:
Cash and cash equivalents include cash on hand consisting of coins, currency, undeposited checks; money orders and drafts; demand deposits in banks; and certain short‐ term, highly liquid investments. Any type of instrument accepted by a bank for deposit would be considered to be cash. Cash must be available for withdrawal on demand. Cash that is restricted as to withdrawal, such as certificates of deposit, would not be included with cash because of the time restrictions. Cash must be available for current use in order to be classified as a current asset. Cash that is restricted in use would not be included in cash unless its restrictions will expire within the operating cycle. Cash restricted for a noncurrent use, such as cash designated for the purchase of property or equipment, would not be included in current assets. (ASC 210‐10‐45‐4) Cash equivalents include short‐term, highly liquid investments that:Are readily convertible to known amounts of cash, andAre so near their maturity (maturities of three months or less from the date of purchase by the entity) that they present negligible risk of changes in value because of changes in interest rates.U.S. Treasury bills, commercial paper, and money market funds are all examples of cash equivalents. Only instruments with original maturity dates of three months or less qualify as cash equivalents. (ASC 205‐10‐45‐1)
Marketable securities representing the investment of cash available for current operations.
Receivables include accounts and notes receivable, receivables from affiliated entities, and officer and employee receivables. The term “accounts receivable” is generally understood to represent amounts due from customers arising from transactions in the ordinary course of business (sometimes referred to as “trade receivables”).
Inventories are goods on hand and available‐for‐sale, raw materials, work in process, operating supplies, and ordinary maintenance materials and parts. The basis of valuation and the method of pricing are to be disclosed.
Prepaid expenses are amounts paid in advance to secure the use of assets or the receipt of services at a future date. Prepaid expenses will not be converted to cash, but they are classified as current assets because, if not prepaid, they would have required the use of current assets during the coming year or operating cycle, if longer. (ASC 205‐10‐ 45‐2) Prepaid rent and prepaid insurance are the most common examples of prepaid expenses.(ASC 210‐10‐45‐1)
Noncurrent Assets ASC 210‐10‐45‐4 excludes the following from current assets:
Cash and claims to cash
