Balance sheet

[code9063]

2010 Specimen paper Q1 (i)

Can you please explain why non acquisition expenses and investment income don't appear in the balance sheet?

 

[Shillington]

2010 Specimen paper Q1 (i)

Can you please explain why non acquisition expenses and investment income don't appear in the balance sheet?

A balance sheet is a snapshot of a company's financials at a point in time. The value of investments (which is generally taken to be equal to the present value of future investment income) is shown on the balance sheet as it recognises a future stream of income which hasn't yet been receieved.

Income received from investments is recognised as it is paid and so won't feature on a balance sheet (other than contributing to the cash asset line).

As with investment income, non-aquisition expenses are generally recognised as they arise and so also do not feature on the balance sheet.

There are some exceptions to the above. Large non-aquisition expenses (for example the purchase of a very large new computer system) may be recognised on the balance sheet as it would be inappropriate to recognise the full expense upfront (in the same way that machinery will be depreciated over time).

An example of investment income being recognised in this way is where some allowance is made for accrued interest. For example, a bond which has a coupon payment 2 months after the balance sheet date may have 4 months (assuming half-yearly coupon payments) of the coupon recognised on the balance sheet.