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 SSThe statement of retained earnings is the financial record that reconciles the retained earnings fluctuation caused by the net income and dividend payout. It also shows the opening balance and closing balance of the retained earnings.tatement 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 equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet. account during an accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance., which is otherwise not available anywhere else in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.. As such, it helps the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. 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.
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 statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. 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 policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level. 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 capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side. 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 reserveRevaluation ReserveA revaluation reserve is a non-cash reserve created to reflect the asset's true value when the market value of a certain asset category is more or less than the asset's value at which it is recorded in the books of account. during the period.
- Closing Balance: It represents the value of equity capital at the end of the reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements..
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 incomeNet IncomeNet Income formula is calculated by deducting direct and indirect expenses from the total revenue of a business.. It is the most important number for the Company, analysts, investors, and shareholders of the Company as it measures the profit earned by the Company over a period of time. 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 –