Definition:
Statement of changes in equity can be defined as the reconciliation between the opening balance of the Shareholder’s Equity Account and the closing balance. It can be described as a financial statement that showcases summarized transactions that are related to the shareholder’s equity over a given accounting period.
The main aspect of this particular statement is to show the movement in Retained Earnings and other reserves and changes in share capital, including the issue of new shares and dividend payments recorded in the report.
Therefore, it can be seen that the Statement of Changes in Equity basically documents the change in balances that occur as a result of movement in equity-related transactions of the company. In the same manner, it is also important to note that the shareholders use the Statement of Changes in Equity to check how their wealth in the company has changed over time.
The Need for Statement of Changes in Equity Report
The underlying difference between Assets and Liabilities varying from one accounting period to the next showcases the movement in equity. This information is mostly obtained from the balance sheet of the entity. However, the most critical information that is missing is the detailed breakdown of the changes that happened in the equity-related transactions. Therefore, a detailed statement is presented that draws a comparison between the Statement of Changes in Equity Report and other relevant information that can be of use to the stakeholders of the company.
Therefore, the Statement of Changes in Equity includes the following aspects:
- Reconciliation of the opening, as well as the closing balance of equity, which further describes the changes in sufficient detail.
- Detailed breakdown of the comprehensive income for the relevant accounting period.
- Detailed breakdown of changes, as well as the impact created when components of equity are restated or applied retrospectively in accordance with the said accounting principles.
Components of Statement of Changes in Shareholder’s Equity
A Statement of Changes in Shareholder’s Equity summarizes the changes in equity components that are listed below:
- For every respective class of contributed equity, the accumulated balance of ‘Other Comprehensive Income’ and ‘Retained Earnings’ are mentioned.
- For Non-Cash Assets, any increase, or decrease in the carrying amount of assets is duly distributed to the owners, that results from changes in the fair value of the said assets.
- Changes in equity share capital, as well as other equity during the said accounting period includes:
- Changes in accounting policy
- Prior Period Returns
- Total (Aggregated) Comprehensive Income
- Dividends
- Transfers to Retained Earnings
- Any other changes
- In order to highlight any other changes in the equity breakdown, it is also important to disclose the following:
- Share application money – Any pending transactions or allotments
- Compounded financial instrument equity’s component
- Revaluation surpluses
- Cash Flow hedges, and gains
- Debt and Equity Instruments through other various sources of comprehensive income
- Similarly, Statement of Changes in Equity also includes changes in other reserves that are incurred in the period. They include the following:
- Capital Redemption Reserve
- Debenture Redemption Reserve
- Others – This mainly includes descriptive information pertaining to nature, as well as purpose of each reserve
- Changes that are incurred as a result of re-measurement of defined benefit plans etc.
The Formula for Calculating Statement of Changes in Equity
There is a general outline of the Statement of Changes in Equity that companies mostly adopt to justify and present the changes in the Shareholder’s Equity across the given timeline. In this regard, the Statement of Changes in Equity can be calculated using the following formula:
Beginning Shareholder’s Equity + Net Income – Dividends + (or -) any Other Changes = Ending Equity
- Opening Balance of Equity: Opening Balance represents the value of equity at the beginning of the reporting period. This amount is similar to the prior period’s closing balance.
- Net Income: Net Income represents the Net Profit, and loss that is reported in the income Statement in the given period.
- Dividends: Dividends Declared during the accounting period are also subtracted from the equity balance since that is representative of the distribution of wealth between the shareholders.
- Other Changes:
- Impact of changes in Accounting Policies: Mostly, changes in accounting policies are applied retrospectively, and that results in adjustments in the preceding period which are further restated in the financial position of the company.
- Impact of changes in Prior Period Collection: The impact of any adjustments in the prior periods are also captured separately in the statement of changes in equity.
- Changes in Share Capital: Issuance, as well as withdrawal of share capital during a said period is also captured in the Statement of Changes in Shareholder’s Equity because it is representative of the movement in equity funding.
- Changes in Reserve Capital: Changes in reserve capital captures all gains and losses that are recognized in the revaluation reserve during the period.
- Closing Balance: Closing Balance represents the value of equity capital at the end of every reporting period.
Preparation of Statement of Changes in Shareholder’s Equity
In order to prepare the statement of changes in Shareholder’s Equity, the following steps are undertaken:
- Checking for separate accounts, and ledgers for each transaction involving (or impacting) equity. This implies that there are different accounts for the par value of the stock, with additional paid-in capital, and retained earnings. Each of these columns are mentioned separately in the Statement of Changes in Equity in order to ensure that there is no confusion pertaining to different column related representation.
- Transferring every transaction within each equity account to a spreadsheet, and then subsequently identifying it in the spreadsheet itself.
- Aggregating the transactions within the spreadsheet into similar categories, and then transferring them to separate line items in the Statement of Changes in Equity.
- Completing the Statement, and then verifying the beginning and ending balances in it, matching it to the general ledger. Furthermore, aggregated line items within the statement are also added to arrive at the ending balances for all columns.
Example of Statement of Changes in Shareholder’s Equity
The presentation, as well as disclosure of Statement of Changes in Shareholder’s Equity, is presented as follows:
| Particulars | Amount |
| Opening Balance of Equity as at 2010 | 100,000 |
| Common Stock and Additional Paid-In Capital | |
| Opening Balance as of Sep 30, 2018 | 40,000 |
| Stocks Issued | 800 |
| Stocks Withheld for Share Settlement | (3000) |
| Stock-based Compensation | 5000 |
| Closing Balance | 42,800 |
| Retained Earnings | |
| Opening Balance of Retained Earnings | 70,000 |
| Net Income | 55,200 |
| Dividend Declared | (14,000) |
| Stock Withheld for Share Settlement | (1,000) |
| Stocks Repurchased | (65,000) |
| Changes in Accounting Policies | 2,500 |
| Closing Balance | 47,700 |
| Accumulated (Other) Comprehensive Income | |
| Opening Balance of Other Comprehensive Income | (5000) |
| Other Comprehensive Income | 3000 |
| Changes in Accounting Policies – Impact | 500 |
| Closing Balance | (1500) |
| Closing Balance of Equity | 92,000 |
In the example mentioned above, it can be seen that all the details and line items impacting the statement of Changes in Equity are incorporated in order to reflect the position of the shareholder’s equity at the end of the given period. It must also be noted that this stencil is not entirely fixed and can be subject to change depending on the existing circumstances and transaction histories.