The balance sheet is a key financial statement that provides a snapshot of a company’s financial position at a specific point in time. It highlights what the company owns (assets), what it owes (liabilities), and what is left for the shareholders (equity). Understanding the different sections of the balance sheet helps stakeholders assess a company's financial health and stability. This article explains the extended balance sheet structure, breaking down each component and providing insight into what these items represent.
Structure of the Balance Sheet
The balance sheet is organized into two main parts:
Assets: What the company owns or controls that can bring future economic benefits.
Capital, Reserves, and Liabilities: What the company owes to others and the equity held by shareholders.
This structure ensures that the company’s total assets equal the sum of its liabilities and equity, a fundamental accounting principle (Assets = Liabilities + Equity).
1. Assets
Assets are the resources controlled by the company, categorized into fixed assets (long-term) and current assets (short-term).
A. Subscribed Capital Unpaid
This category covers the amount of share capital that shareholders have committed to but have not yet paid. It is further divided into:
Subscribed Capital Not Called: The portion of capital that the company hasn’t yet requested from shareholders.
Subscribed Capital Called But Unpaid: The capital that shareholders are required to pay but haven’t yet done so. This is similar to a receivable, representing future inflows of funds.
B. Formation Expenses
Formation expenses include costs incurred during the establishment of the company, such as legal fees, registration, and administrative setup costs. These costs are typically amortized over a set period, rather than being expensed immediately, allowing the financial burden to be spread over time.
C. Fixed Assets (Non-Current Assets)
Fixed assets are long-term resources used in the company’s operations and are expected to provide economic benefits over more than one year. These are divided into:
I. Intangible Assets: These are non-physical assets that provide a company with long-term value and competitive advantages. Examples include:
Development Costs: Expenditure on developing new products or processes that are expected to generate future revenue.
Concessions, Patents, and Licenses: Legal rights that provide exclusive use or control over a product or service.
Goodwill: The premium paid when acquiring another company, representing intangible benefits like brand reputation, customer loyalty, or market position.
Payments on Account: Advance payments for intangible assets under development.
II. Tangible Assets: These are physical assets that a company uses in its operations. They include:
Land and Buildings: Real estate used for operational purposes.
Plant and Machinery: Industrial equipment and machinery essential for production.
Other Fixtures and Fittings, Tools, and Equipment: Office equipment, furniture, and tools.
Payments on Account: Advance payments made for assets still under construction or delivery.
III. Financial Assets: Long-term investments held by the company to generate income or strategic advantages, such as:
Shares in Affiliated Undertakings: Investments in related companies, which may provide dividends or other financial returns.
Loans to Affiliated Undertakings: Loans granted to subsidiaries or related companies to support their growth or operations.
Participating Interests: Investments in companies where the company has significant influence but not full control.
Other Loans: Long-term loans made to unrelated third parties or individuals.
D. Current Assets (Short-Term Assets)
Current assets are resources expected to be converted into cash or consumed within one year. These assets are crucial for assessing the company’s short-term liquidity. Current assets include:
I. Stocks (Inventories): Items held for sale or used in production, such as:
Raw Materials and Consumables: Basic materials used in manufacturing.
Work in Progress: Goods that are partially completed.
Finished Goods: Products that are ready for sale.
Payments on Account: Prepayments made for stock that has not yet been received.
II. Debtors: Amounts owed to the company by customers and other entities, including:
Trade Debtors: Receivables from customers for goods or services sold on credit.
Amounts Owed by Affiliated Undertakings: Receivables from related companies.
Other Debtors: Miscellaneous receivables, such as tax refunds or advances.
III. Investments: Short-term financial investments, such as:
Shares in Affiliated Undertakings: Short-term investments in related companies.
Own Shares: Company shares that have been repurchased.
Other Investments: Financial instruments held for short-term gain.
IV. Cash at Bank and in Hand: Cash balances, including bank deposits and physical cash, which are readily available for immediate use.
E. Prepayments
Prepayments are amounts paid in advance for goods or services that will be received in the future, such as rent, insurance, or subscriptions. These prepayments are recorded as assets because they represent future benefits to the company.
2. Capital, Reserves, and Liabilities
This section of the balance sheet shows how the company is financed, including shareholder equity (capital and reserves) and liabilities (amounts owed to creditors).
A. Capital and Reserves
This represents the shareholders' investment in the company and the accumulated profits retained in the business. It includes:
I. Subscribed Capital: The total amount of capital that shareholders have invested in the company.
II. Share Premium Account: The amount paid by shareholders over and above the nominal value of shares issued.
III. Revaluation Reserve: A reserve created when the value of an asset is increased upon revaluation, capturing unrealized gains.
IV. Reserves: Retained earnings that have been set aside for future use.
Legal Reserve: A portion of the company’s profits set aside to protect creditors in the event of losses.
Reserve for Own Shares: A reserve created when a company buys back its own shares.
Other Reserves: Reserves set aside for various purposes, such as future investments or risk management.
V. Profit or Loss Brought Forward: Profits or losses from previous years that have been retained in the company.
VI. Profit or Loss for the Financial Year: The net profit or loss for the current period, showing whether the company was profitable during the year.
VII. Interim Dividends: Dividends paid to shareholders before the annual financial statements are finalized.
VIII. Capital Investment Subsidies: Grants received for specific capital investments, such as government subsidies for purchasing machinery or equipment.
B. Provisions
Provisions are amounts set aside to cover future liabilities or risks, including:
Provisions for Pensions and Similar Obligations: Funds reserved for future pension payments or retirement benefits.
Provisions for Taxation: Amounts set aside to pay future taxes.
Other Provisions: General provisions for future liabilities, such as legal claims, warranties, or restructuring costs.
C. Creditors
Creditors are the company’s liabilities—amounts that it owes to external parties, including short-term and long-term debts:
Debenture Loans: Loans issued in the form of bonds, which may be convertible (into equity) or non-convertible.
Amounts Owed to Credit Institutions: Loans and borrowings from banks or other financial institutions.
Payments Received on Account of Orders: Advances received from customers for goods or services not yet delivered.
Trade Creditors: Amounts owed to suppliers for goods or services received.
Bills of Exchange Payable: Promissory notes issued by the company that must be repaid.
Amounts Owed to Affiliated Undertakings: Loans or debts owed to related companies.
Other Creditors: Miscellaneous liabilities, including taxes payable and social security obligations.
D. Deferred Income
Deferred income refers to revenue received in advance for goods or services that have not yet been delivered. This is classified as a liability because the company has an obligation to provide the goods or services in the future.
Filing Requirements for Abridged Accounts in Luxembourg
Luxembourg allows small companies to file abridged accounts instead of the full extended balance sheet. To qualify for abridged accounts, a company must meet two out of the following three criteria for two consecutive financial years:
Balance sheet total: Less than €4.4 million.
Net turnover: Less than €8.8 million.
Average number of full-time employees: Fewer than 50.
If a company exceeds these thresholds, it is required to file extended accounts, which include a detailed breakdown of assets, liabilities, and equity, along with additional disclosures such as notes to the financial statements and, in some cases, an audit report
Conclusion
The balance sheet is a fundamental tool for understanding a company's financial health. The extended balance sheet offers a detailed view of a company’s assets, liabilities, and equity, enabling stakeholders to evaluate both short-term liquidity and long-term solvency.
Comments