Knowing and understanding what is Statement of Changes in Equity
IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements. The statement must show: [IAS 1.96]
(a) profit or loss for the period;
(b) each item of income and expense for the period that is recognised directly in equity, and the total of those items;
(c) total income and expense for the period (calculated as the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest; and
(d) for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8.
The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: [IAS 1.97]
(a) capital transactions with owners;
(b) the balance of accumulated profits at the beginning and at the end of the period, and the movements for the period; and
(c) a reconciliation between the carrying amount of each class of equity capital, share premium and each reserve at the beginning and at the end of the period, disclosing each movement.
There are three types of a company, namely sole proprietorship, partnership and corporation. These companies have different structures of equity. For a sole proprietorship, the equity is simply called an owner’s equity or capital (composed of owner’s contributions and drawings and accumulated earnings or losses). In a partnership, the equity is composed of all the partners’ equity (partners’ capital contribution and drawings and accumulated and undivided earnings and losses. And lastly, the components of the equity of a stock – corporation include capital stock (common and preferred shares), treasury stock and retained earning (appropriated or unappropriated). Because of the differences in equity structures of different types of companies, the statement of changes in equity may also differs.
The purpose of the statement of changes in equity is to provide readers with the useful information on how the capital or fund of an entity is utilized and used. Since it shows the movements of equity and accumulated earnings and losses, the readers can depict on where the company’s equity came from and where did it go.