LOS D requires us to:
distinguish between current and non-current assets and current and noncurrent liabilities.
Current Assets are those assets which are:
a. held for trading, or
b. expected to be sold, or
c. realized in cash, or
d. used up
within an operating cycle or one year.
Operating Cycle is the total time taken by a firm to:
a. produce/purchase its inventory,
b. sell the products and
c. collect the cash.
All the assets other than the current assets are called non-current assets.
Current Liabilities are all those liabilities (including non-deferrable obligations), which are due to be settled:
a. within one year, or
b. within one operating cycle
whichever is greater.
According to IFRS, even if liability is due to be settled in a period greater than one year, it would still be termed as a current liability if it is a part of working capital.
All the liabilities other than the current liabilities are called non-current liabilities.
Thus any asset/liability should be considered as current if any of the following criteria is met:
a. Settlement/realization is expected during the normal operating cycle.
b. Settlement/realization is expected within one year.
c. It is held for trading purposes.
d. Nonexistence of unconditional right to defer the settlement for more than one year.
The difference between the current assets and current liabilities is called the working capital. A firm needs to maintain its working capital to run its operations smoothly. Excess of working capital indicates inefficiency in utilization of assets, whereas low working capital shows a lack of liquidity of a firm.