Understanding assets, liabilities, equity, intangibles, and financial instruments analysis
The Balance Sheet is a financial snapshot of a company's financial position at a specific point in time. It follows the fundamental equation:
For analysts, the balance sheet is essential for assessing:
Can the company pay its short-term bills?
Can it meet long-term obligations?
Is the company over-leveraged or under-invested?
Analysts use balance sheet ratios to compare companies and track trends over time.
A classified balance sheet groups similar items together. Here is a detailed breakdown of its typical structure.
| Component | Description |
|---|---|
| Assets (What the company owns) | |
| Current Assets | Assets expected to be converted to cash or used up within one year. |
| Cash & Cash Equivalents | The most liquid assets, including currency, bank deposits, and short-term money market instruments. |
| Marketable Securities | Short-term debt or equity investments that are readily marketable. |
| Accounts Receivable | Money owed to the company by customers for goods or services already delivered. |
| Inventory | Raw materials, work-in-process goods, and finished goods held for sale. |
| Non-Current Assets | Long-term assets not expected to be converted to cash within one year. |
| Property, Plant & Equipment (PP&E) | Tangible, long-lived assets used in operations, such as land, buildings, and machinery. |
| Intangible Assets | Non-physical assets like patents, trademarks, and copyrights. |
| Goodwill | Arises from acquiring another company for more than the fair value of its net assets. |
| Liabilities (What the company owes) | |
| Current Liabilities | Obligations due within one year. |
| Accounts Payable | Money owed to suppliers for goods or services received on credit. |
| Short-Term Debt | Loans and other borrowings due within one year. |
| Accrued Expenses | Expenses that have been incurred but not yet paid (e.g., salaries, rent). |
| Non-Current Liabilities | Obligations due after one year. |
| Long-Term Debt | Loans and other borrowings with maturities of more than one year. |
| Bonds Payable | Long-term debt securities issued to investors. |
| Deferred Tax Liabilities | Taxes that will likely be paid in a future period. |
| Shareholders' Equity (Owners' claim on net assets) | |
| Common Stock / Paid-in Capital | The amount invested by shareholders to purchase stock from the company. |
| Retained Earnings | Cumulative net income that has been retained for reinvestment, not paid out as dividends. |
| Treasury Stock | Stock that the company has repurchased from the open market (a contra-equity account). |
Intangible assets are non-physical, non-monetary assets that provide future economic benefits. Examples include:
To be recognized on the balance sheet, an intangible must be:
| Topic | IFRS | U.S. GAAP |
|---|---|---|
| Internally Created Intangibles |
Research costs: Expensed Development costs: Can be capitalized if criteria met |
All costs: Expensed (including R&D) |
| Measurement Models | Choice: Cost model or Revaluation model | Only Cost model allowed |
Amortized over useful life (e.g., patent with 10-year life)
Not amortized. Must be tested for impairment annually (e.g., trademarks)
A company capitalizes a $100,000 patent with a 10-year life.
Goodwill arises only in a business acquisition. It's the excess of the purchase price over the fair value of the net identifiable assets acquired.
Recorded on the balance sheet after an acquisition
Not on the balance sheet — reflects brand strength, customer loyalty, or superior management
A company has $50M in goodwill. After a market downturn, the recoverable amount is $40M.
Because goodwill is subjective, analysts often adjust financials:
Under both IFRS 9 and U.S. GAAP, financial assets are classified based on the entity's business model and the contractual cash flow characteristics. Below is a clear comparison of the three primary classifications.
| Classification | Typical Assets | Intent / Business Model | Measurement Basis | Interest/Dividends | Unrealized Gains/Losses |
|---|---|---|---|---|---|
| Held-to-Maturity (HTM) (U.S. GAAP) Amortized Cost (IFRS) |
Bonds (debt securities) | Hold to maturity; collect contractual cash flows | Amortized cost | Income Statement | n/a — No recognition |
| Trading (Both U.S. GAAP & IFRS) |
Stocks, bonds, derivatives | Active trading for short-term profit | Fair Value Through Profit or Loss (FVPL) | Income Statement | Income Statement |
| Available-for-Sale (AFS) (U.S. GAAP) FVOCI (IFRS) |
Bonds, equities (non-trading) | May sell before maturity, but not actively traded | Fair Value Through Other Comprehensive Income (FVOCI) | Income Statement | Other Comprehensive Income (OCI) — Balance Sheet (AOCI) |
| Feature | U.S. GAAP | IFRS |
|---|---|---|
| Equity Investments | Generally FVPL unless designated as AFS | Can be FVOCI (irrevocable election) |
| Debt Instruments | HTM, AFS, Trading | Amortized Cost, FVOCI, FVPL |
| Reclassification | Permitted between AFS and Trading (rare) | Generally prohibited |
| OCI Recycling | Yes (for AFS debt) | No (for equity FVOCI); Yes (for debt FVOCI) |
A company buys corporate bonds expecting to hold them until maturity to receive interest payments. It does not plan to trade them.
Classification: Held-to-Maturity (U.S. GAAP) or Amortized Cost (IFRS)
Impact: Unrealized price changes do not affect net income — only interest income is reported.
Non-current liabilities are obligations due beyond one year or the operating cycle.
Includes long-term loans, bonds payable. Usually measured at amortized cost.
Exceptions (measured at fair value):
A DTL arises when accounting income > taxable income due to temporary timing differences.
Lower taxes paid now than reported on income statement
Using accelerated depreciation for tax purposes but straight-line for financial reporting
The difference reverses in the future, creating a tax obligation.
A company uses straight-line depreciation ($10K/year) for financials but accelerated ($15K/year) for taxes.
Each item is expressed as a percentage of total assets.
Interpretation: Higher = better short-term liquidity
Why? Excludes inventory — more conservative measure
Most conservative — only the most liquid assets included
Balance Sheet analysis typically accounts for 6-9% of Level I FSA weight. Master these areas:
Financial Instruments Classification: Trading securities have unrealized gains/losses recognized in net income. AFS/FVOCI securities have unrealized gains/losses in OCI. HTM/Amortized Cost has no recognition of unrealized changes.
Goodwill vs. Intangible Assets: Goodwill is never amortized under IFRS or U.S. GAAP - only tested for impairment annually. Finite-life intangibles are amortized over useful life. Indefinite-life intangibles are not amortized but tested for impairment.
Quick Ratio: Excludes inventory because it takes time to convert to cash. Only includes cash, marketable securities, and accounts receivable.
Deferred Tax Liability: Created when accounting income exceeds taxable income, often due to accelerated depreciation for tax but straight-line for books. This means paying more taxes later.
Internally Generated Intangibles: U.S. GAAP expenses all R&D including development. IFRS expenses research but can capitalize development if criteria are met. Neither standard allows capitalization of internally generated brands.