Statement of Changes in Equity

The reconciliation of the opening and closing balances of shareholder equity is known as the Statement of Changes in Equity. The Statement of Changes in Equity functions as a financial statement, detailing the transactions related to the shareholder’s equity during a given financial period. This report captures fluctuations in retained earnings, additional reserves, and adjustments in share capital, including the issue of new shares and dividend distribution.

What is the need for the Statement of Changes in Equity?

Assets and liabilities vary from financial period to financial period, affecting equity. The firm’s balance sheet can provide valuable insights. However, the balance sheet alone cannot provide details about the modifications that have occurred in equity, which is why a statement of changes in equity is necessary.

While Schedule III of the Companies Act 2013 mandates the disclosure of such changes in the shareholder’s equity in the notes to accounts, Indian GAAP supervision does not require that statement. In accordance with IND AS, the following is included in the statement of changes in equity that must be presented:

• Reconciliation of the equity opening and closing balances, providing a detailed description of the changes.
• Information about the accounting period’s total income.
• Information on modifications and their effects when equity components are restated or applied retroactively in compliance with IAS/Ind-AS 8.

The money that appears on the income statement after the net income is known as comprehensive income.

The components that constitute up shareholder equity

The following equity components’ changes are often summarized in a statement of equity:

• For each type of equity contribution, the total balance of gains and losses that are not included in the company’s net income and accumulated profits.
• With regard to non-cash assets, the surge and decline in the carrying amount which is disbursed to the owners as an outcome of fluctuations in the current value of such assets.
• Movements in the equity share capital and additional equity within the fiscal period of:
  1. Alterations in accounting policy
  2. Errors from previous periods

• Total inclusive income

1. Dividends
2. Allocations to retained earnings (It is the accumulated profits from the starting of the net operating income after dividends paid or any correction adjustments.)

Any additional changes

• As regards the modifications in other equity, the following are to be revealed:

1. Funds received for share applications – pending issuance
2. Equity portion of a compound financial instrument

• Funds and reserves, including capital reserve and premium reserves

1. Revaluation reserve
2. Profits or losses from cash flow hedging
3. In the event of a financial statement of a foreign based operation is interpreted, the exchange rate difference

• Equity and debt instruments obtained from various sources of comprehensive income, etc.
• Modifications to additional reserves such as:

1. Reserve for capital redemption
2. Reserve for Debenture Redeemable

• Others—with a description of each reserve’s nature and objectives
• Modifications brought upon by defined benefit plans’ remeasurement, etc.

Questions to Understand your ability

Q1.) What’s the main purpose of the Statement of Changes in Equity?

A) To show the company’s revenue and expenses

B) To explain how shareholder equity has changed over time

C) To list all the company’s liabilities

D) To calculate profit before tax

Q2.) Which of the following is NOT included in the Statement of Changes in Equity?

A) Opening and closing balances of equity

B) Total income for the period

C) Cash flows from operating activities

D) Changes due to accounting policy updates

Q3.) What’s a key component of equity that the Statement of Changes in Equity highlights?

A) Total liabilities of the company

B) Changes in the value of non-cash assets

C) Interest paid on loans

D) Tax payments made

Q4.) According to IND AS, which of these MUST be shown in the Statement of Changes in Equity?

A) Number of shares issued

B) Reconciliation of equity balances at the start and end of the period

C) The company’s total sales

D) Total number of employees

Q5.) Which of the following reserves is REQUIRED to be disclosed in the Statement of Changes in Equity?

A) Reserve for capital redemption

B) Employee pension reserve

C) Tax provision reserve

D) Operational reserve

Conclusion

In conclusion, the Statement of Changes in Equity is a vital financial statement that provides a detailed reconciliation of the opening and closing balances of shareholder equity. It captures changes in retained earnings, reserves, share capital, and other equity components, offering transparency into factors like comprehensive income, dividends, revaluation reserves, and modifications in accounting policies. This statement ensures compliance with accounting standards and helps stakeholders assess the company’s financial health and performance over time.