What is Statement of Changes in Equity?
Statement of Changes in Equity refers to the reconciliation of the opening and closing balances of equity in a company during a particular reporting period. It explains the connection between a company’s income statement and balance sheet and also includes all those transactions not captured in these two financial statements, such as dividend payment, equity withdrawal, accounting policies changes, and corrections of prior period errors, etc.
In the US, the Statement of Changes in Equity is also known as the Statement of Retained Earnings and is required under the US GAAP.
This primary purpose of Statement of Changes in Equity is to provide details about all the movements in the equity account during an accounting period, which is otherwise not available anywhere else in the financial statements. As such, it helps the shareholders and investors in making more informed decisions about their investments. Further, it also allows the analysts and other readers of the financial statements to understand what factors resulted in the change in the equity capital.
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The formula for a statement of changes in equity includes the opening and closing value of the equity, net income for the year, dividends paid, along with other changes.
- Opening Balance: It represents the value of equity capital at the beginning of the reporting period, which is the same as the prior period’s closing balance of equity.
- Net Income: It represents the net profit or loss reported in the income statement during the period.
- Dividends: Dividends declared during the reporting period should be subtracted from the equity balance as it represents the distribution of wealth among shareholders.
- Other Changes include the following –
- Effects of Changes in Accounting Policies: Usually, changes in accounting policies have to apply retrospectively, which results in adjustments in the preceding period and then restated financial position.
- Effects of Prior Period Correction: The effects of other prior period adjustments should be captured separately in the statement of changes in equity.
- Changes in Share Capital: Issuance (increase) and withdrawal/ redemption (decrease) of share capital during the period should be captured to show movement in equity funding.
- Changes in Reserve Capital: It captures all gains and losses recognized in the revaluation reserve during the period.
- Closing Balance: It represents the value of equity capital at the end of the reporting period.
Steps to Prepare Statement of Changes in Equity
- Step #1 Firstly, determine the value of the equity at the beginning of the reporting period, which is the same as the value at the end of the last reporting period. It is the opening balance of equity.
- Step #2 Next, determine the net income or loss booked by the firm.
- Step #3 Next, determine the value of the dividend declared by the management for the reporting period.
- Step #4 Next, determine all the adjustments for the reporting period, which may include effects of changes in accounting policies, correction of prior period errors, changes in reserve capital as well as share capital.
- Step #5 Finally, the closing balance of equity can be derived by adding net income (step 2) to the opening balance of equity (step 1), deducting dividends (step 3), and other adjustments (step 4), as shown below.
Now, let us have a look at the annual report of Apple Inc. for the year 2019 and see how the statement of changes in equity is reported in real-life cases.
Source: Apple SEC Filings
This has been a guide to What is Statement of Changes in Equity & its Definition. Here we discuss its formula along with example and how to prepare it. You can learn more about finance from the following articles –