What is the statement of changes in equity?
The statement of changes in equity reports the movement in shareholders’ equity of a company during a given financial period, such as a year.
Express differently, the statement of changes in equity reconciles the opening and closing balances of a company’s equity account of a specific accounting period.
The statement is also referred to as an equity statement or a statement of owner’s equity.
What is equity?
Simply put, equity refers to the money shareholders have invested in a company. It is also called shareholders’ equity and is part of the total amount of capital invested in a company.
Equity is reported on the balance sheet of a company under the heading ‘Shareholders’ Equity,’ also called ‘Stockholders’ Equity.’
Shareholders’ equity includes three components:
- Net income
- Retained earnings
- Share capital
One of the components of a complete set of financial statements
International Accounting Standard 1 Presentation of Financial Statements requires a complete set of financial statements for a given financial period, comprising:
- ‘a statement of financial position (balance) sheet at the end of the period
- a statement of profit or loss and other comprehensive income for the period
- a statement of changes in equity
- a statement of cash flows for the period
- notes, comprising a summary of significant accounting policies and other explanatory notes
- comparative information prescribed by standard’
In addition, IAS 1 requires that ‘all financial statements be presented with equal prominence.’
(Accentuations in quotations from IAS 1 are by the article writer.)
However, the equity statement is not usually included in the internal or management financial statements of a company.
Items included in the statement of changes in equity
Based on IAS 1.106, describing what an equity statement is required to show, the following items, when applicable, are included in the statement of changes in equity.
- Opening balance
The opening balance reflects the closing balance of the previous financial period’s equity statement. All further changes (additions and deductions) to a company’s equity are made to the opening balance of the statement.
- Net income or net loss
The net income or net loss is obtained from a company’s income statement, also called the profit and loss statement. Net income or net loss, also referred to as net earnings or net loss, is the bottom-line figure on the income statement. It is calculated by deducting the cost of goods sold (COGS) and all other relevant expenses from sales (revenue).
Net income is added to the opening balance and a net loss is deducted from it.
- Other comprehensive income
According to IAS1.106A, ‘an analysis of other comprehensive income by item is required to be presented either in the statement or in the notes.’
Other comprehensive income refers to revenues, gains, and losses that are excluded from net income on a company’s income statement that has yet to be realised.
Examples of other comprehensive income are:
- Unrealised gains/losses on derivative financial instruments.
- Forex gains or losses.
As with net income or net loss, other comprehensive income increases the opening balance. Conversely, another comprehensive loss reduces the opening balance of the equity statement.
- Dividends
Dividends declared and distributed to shareholders are rewards earned by the shareholders on their investment in a company. Dividends reduce the total of shareholders’ equity.
- Other changes comprise the following:
- Effect of changes in accounting policies
Usually, changes in accounting policies are applied retrospectively, resulting in adjustments in the preceding financial period and then restate the opening balance ‘to the amount that would be arrived if the new accounting policy had always been applied,’ as described by accounting-simplified.com.
- Effects of prior period correction
The effects of the correction of prior period errors must be captured separately in the statement of changes in equity as adjustments to opening reserves. It is not allowed that the effect of the corrections is deducted from the opening balance of shareholders’ equity.
- Changes in share capital
Issuance of shares must be added in the statement because there is an increase in shareholders’ equity.
Redemption of shares
When shares are redeemed or capital is taken out of a company, it is indicated as a deduction in the equity statement because it reduces the total of the company’s shareholders’ equity.
- Changes in the revaluation reserve
All gains and losses in the revaluation reserve during a given financial period must be reported in the statement of changes in equity to the extent that they are not included in the income statement.
Revaluation reserve, also called asset revaluation reserve, is an accounting term, representing a line item on a company’s balance sheet, representing a reassessment of the value of a capital assessment as at a specific date.
- Closing balance
The closing balance represents the value of shareholders’ equity at the end of the accounting period. This is the amount reported as shareholders’ equity in the balance sheet (statement of financial position) of a company.
Purpose and importance of the statement of changes in equity
The main purpose of the equity statement is to identify all the changes in the equity account during a given accounting period that are not separately disclosed elsewhere in the financial statements.
The statement enables shareholders and analysts to make more informed decisions about a company as an investment.
In addition, the statement of owner’s equity allows investors, analysts, and other interested people to comprehend what factors contributed to the changes in the equity of a company.
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