Statement of Changes in Equity
Statement of Changes in Equity, often referred to as Statement of Retained Earnings in U.S. GAAP, details the change in owners' equity over an accounting period by presenting the movement in reserves comprising the shareholders' equity.
Movement in shareholders' equity over an accounting period comprises the following elements:
- Net profit or loss during the accounting period attributable to shareholders
- Increase or decrease in share capital reserves
- Dividend payments to shareholders
- Gains and losses recognized directly in equity
- Effect of changes in accounting policies
- Effect of correction of prior period error
Following is an illustrative example of a Statement of Changes in Equity prepared according to the format prescribed by IAS 1 Presentation of Financial Statements.
|Share Capital||Retained Earnings||Revaluation Surplus||Total Equity|
|Balance at 1 January 2011||100,000||30,000||-||130,000|
|Changes in accounting policy||-||-||-||-|
|Correction of prior period error||-||-||-||-|
|Changes in equity for the year 2011|
|Issue of share capital||-||-||-||-|
|Income for the year||-||25,000||-||25,000|
|Balance at 31 December 2011||100,000||40,000||10,000||150,000|
|Changes in equity for the year 2012|
|Issue of share capital||-||-||-||-|
|Income for the year||-||30,000||-||30,000|
|Balance at 31 December 2012||100,000||50,000||15,000||165,000|
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Following are the main elements of statement of changes in equity:
This represents the balance of shareholders' equity reserves at the start of the comparative reporting period as reflected in the prior period's statement of financial position. The opening balance is unadjusted in respect of the correction of prior period errors rectified in the current period and also the effect of changes in accounting policy implemented during the year as these are presented separately in the statement of changes in equity (see below).
Effect of Changes in Accounting Policies
Since changes in accounting policies are applied retrospectively, an adjustment is required in stockholders' reserves at the start of the comparative reporting period to restate the opening equity to the amount that would be arrived if the new accounting policy had always been applied.
Effect of Correction of Prior Period Error
The effect of correction of prior period errors must be presented separately in the statement of changes in equity as an adjustment to opening reserves. The effect of the corrections may not be netted off against the opening balance of the equity reserves so that the amounts presented in current period statement might be easily reconciled and traced from prior period financial statements.
This represents the equity attributable to stockholders at the start of the comparative period after the adjustments in respect of changes in accounting policies and correction of prior period errors as explained above.
Changes in Share Capital
Issue of further share capital during the period must be added in the statement of changes in equity whereas redemption of shares must be deducted therefrom. The effects of issue and redemption of shares must be presented separately for share capital reserve and share premium reserve.
Dividend payments issued or announced during the period must be deducted from shareholder equity as they represent distribution of wealth attributable to stockholders.
Income / Loss for the period
This represents the profit or loss attributable to shareholders during the period as reported in the income statement.
Changes in Revaluation Reserve
Revaluation gains and losses recognized during the period must be presented in the statement of changes in equity to the extent that they are recognized outside the income statement. Revaluation gains recognized in income statement due to reversal of previous impairment losses however shall not be presented separately in the statement of changes in equity as they would already be incorporated in the profit or loss for the period.
Other Gains & Losses
Any other gains and losses not recognized in the income statement may be presented in the statement of changes in equity such as actuarial gains and losses arising from the application of IAS 19 Employee Benefit.
This represents the balance of shareholders' equity reserves at the end of the reporting period as reflected in the statement of financial position.
Purpose & Importance
Statement of changes in equity helps users of financial statement to identify the factors that cause a change in the owners' equity over the accounting periods. Whereas movement in shareholder reserves can be observed from the balance sheet, statement of changes in equity discloses significant information about equity reserves that is not presented separately elsewhere in the financial statements which may be useful in understanding the nature of change in equity reserves. Examples of such information include share capital issue and redemption during the period, the effects of changes in accounting policies and correction of prior period errors, gains and losses recognized outside income statement, dividends declared and bonus shares issued during the period.