The statement of changes in equity shows the change in an owner's or shareholder's equity throughout an accounting period. Also called the statement of retained earnings, or statement of owner's equity, it details the movement of reserves that make up the shareholder's equity.
Equity is the value of an asset minus the value of all liabilities on that asset. When you have equity in a home, for example, your equity is the difference between the home's fair market value and the outstanding balance of your mortgage loan. The statement of changes in equity is important because it offers key information about equity reserves that can't be found anywhere else in financial statements.
The Main Elements of Statement of Changes in Equity
There are several elements to the statement of retained earnings or statement of changes in equity. Because you are tracking the movement of equity, you must look at:
- Net profit or loss attributed to shareholders.
- A decrease or an increase in share capital reserves.
- The dividend payments made to shareholders.
- Any changes in accounting policy.
- Any corrections of prior period errors.
Understanding the Statement
To get started, you first want to know the opening balance of an account because this represents the amount of shareholders' equity reserves at the start of the reporting period. It is important to understand that the opening balance is taken from the prior period’s statement of financial position, which means it is unadjusted. Any necessary or suggested adjustments will be presented separately in the statement of changes in equity; changes in accounting policy and correction of prior period errors.
Next, it's important to check and see if there have been any changes in accounting policy. The effects of any changes will be reported in the classification.
Any prior period errors that have affected the equity must be recorded as an adjustment to the opening reserves, not the opening balance. This will allow the current period amounts to be reconciled, and traced to prior period financial statements.
Now you will see the restated balance, which is the amount of the stockholder’s equity after adjustments are made due to the types of changes and corrections listed above.
Other Important Sections of This Statement
Now that you have the restated balance, there are some other sections on the statement of changes in equity that are important to know. The Changes in Share Capital explains whether or not there was any further issuance of share capital during the accounting period. This must be added to the statement of changes in equity. Then the redemption of shares must be deducted.
Any dividend payments for the current period must also be deducted from shareholder equity because it is a distribution of wealth to the stockholders.
Any stockholders' profits or losses should also be reported as taken from the income statement.
Revaluation gains and losses in the statement of changes in equity should also be included. However, any gains included in the income statement due to a reversal of previous losses should not be recorded separately. These will show up in the profit and loss section for the accounting period.
Finally, you will see the closing balance, which is the balance of the shareholders' equity reserves at the end of the accounting period.
Why This Statement Is Important
The statement of changes in equity is important because it allows analysts and reviewers of financial statements to see what factors caused a change in owner’s equity during the accounting period. You can find the movements of shareholder reserves on the balance sheet. However, information detailing equity reserves is not recorded separately in the other financial statements.