April 19, 2021

SB-Accounting

Accounting + Finance Blog

Business term: Statement of changes in equity

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IAS 1 required companies to prepare and present a statement of changes in equity of the company. Such a statement is necessary as equity formed the major component of funds for the business. Moreover, this statement is a part of the general-purpose financial statement.

Definition of Statement of Changes in Equity

A statement of changes in equity is part of a set of financial statements prepared and presented to disclose events that occur in the company that causes changes to the equity capital.

What you should know?

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There are various events that may cause changes in the equity of a business concern.

Dividend: When a dividend is paid or owed by the company, it causes a change in the position of the owner’s equity. However, IAS 1 suggests that such change may be reported either in the statement of changes in equity or in the notes to the financial statements.

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Comprehensive income: At the end of every year, a firm is likely to make more profit or incur losses. The total comprehensive income from the statement of profit or loss is transferred to this statement. Whatever is the case, this results in a change in the equity of the firm. Also note that net income increase the equity of a company, while net loss reduces it.

Reserves: A company may allocate a certain amount of profit as a reserve before paying a dividend to shareholders. Such reserves are done for prudent reason. Other companies, for example, banks may keep statutory reserves. This results in changes in equity and therefore reported in the statement of changes in equity. An example of reserves is the Revaluation Reserve.

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Retrospective restatement: When there is a change in accounting policy used in presenting the business financial statement, such change is reflected in this statement. In addition, correction of the prior year, errors are reflected in this statement.

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Other information: There are certain gains or losses that directly affect equity. These changes are presented in the statement of changes in equity. For example, if the company issue the right shares or gives out bonus shares to shareholders.

It’s Importance

The statement of changes in equity at a glance may not seem like a necessary statement that must be presented to stakeholders of a business concern. However, to major stakeholders, most importantly shareholders and investors, this statement is a valuable tool for analysis.

The statement of changes in equity reveals what causes the equity capital of the company to increase or decrease in an accounting period. Such changes tell more about the decisions made by the management of the firm.

Screenshot of a statement of changes in equity

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Below is a screenshot of the changes in equity of Dangote Cement, a company quoted in the Nigerian stock exchange.

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Business term: Statement of changes in equity

From the statement, you may notice the separate figures and head for retained earnings, etc.

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