In the income statement, the profit or loss of a company for the period is reported. The income statement includes an extension referred to as comprehensive income in which unrealized gains or losses are deducted to provide a broader definition of profit or loss.
These unrealized gains or losses are then transferred to the statement of changes in equity, also known as the statement of changes in shareholders’ equity. Let’s first discuss what the statement of changes in equity is and what makes it different from other financial statements.
DEFINITION
Statement of changes in equity explains the changes in a company’s accumulated reserves, share capital, and retained earnings over the reporting period. The main items of the statement typically include profit or loss for the period, issue and redemption of shares, dividends paid, and revaluation reserves.
The statement of changes in owner’s equity is one of the four basic financial statements in which the company reports changes in revaluations, retained earnings, dividends paid for the period, and other line items credited to the comprehensive income statement.
REQUIREMENT
IFRS requires companies to include the following items in the statement of changes in equity.
- Total comprehensive income for the period: Amounts attributable to shareholders of the company and to non-controlling interests (NCI).
- Other Comprehensive Income: Either presented in the statement or a disclosure.
- Profit or loss for the period: The final figure of profit or loss is taken from the income statement.
- Transactions with owners: This includes contributions by (issuing shares) and distributions to owners (dividends) and changes in ownership interests in subsidiaries that do not result in a loss of control.
Items that will either be presented on the face of the statement of changes in equity or disclosed in a note include:
- Related amount per share
- Dividends recognized as distributions
FORMAT OF STATEMENT OF CHANGES IN EQUITY
Unlike other financial statements, the format of the statement of changes in equity is pretty much short and simple. The opening balance is listed on top, followed by shares issued during the period, cash and stock dividends declared, treasury stocks acquired (sometimes), and finally a closing balance is calculated.
The statement of changes in equity can be seen in the following format. I’ve put random numbers to make the format easier to understand. Like the income statement, the statement of changes in equity shows the performance of a company for a period. Therefore, while presenting the statement, the heading would be; Statement of changes in shareholders’ equity for the period ended 31 March 20×3.
| Share Capital | Equity Option | Revaluation Reserve | Retained Earnings | Total Equity | |
|---|---|---|---|---|---|
| Balance at 1 April 20×2 (Opening) | 6000 | – | – | 1400 | 7400 |
| 8% Loan Note issue | – | 1524 | – | – | 1524 |
| Comprehensive income | – | – | 11250 | 53352 | 64602 |
| Balance at 31 March 20×3 | 6000 | 1524 | 11250 | 54752 | 73526 |
HOW TO PREPARE SOCE (STEP-BY-STEP)
The statement of changes in equity can be prepared easily by following a few simple steps. The first thing you need to understand is that the statement of changes in equity is prepared for a period and reflects the performance of the entity for the period just like the income statement.
STEP 1: WRITE YOUR HEADING
As mentioned, the statement of changes in equity is prepared for a period and therefore the heading should reflect this phenomenon. That being said, the heading should include the following information.
- Company’s Name
- Which statement is being presented
- The fact that it is for a period
- Year End
Let me give you an example of a heading that incorporates all of the above information. For example, if you are about to prepare the statement of changes in equity for company x and the year-end of company x is 31 December 20×3. The heading would be:
Company X
Statement of changes in equity
For the year ended 31 Dec 20×3
STEP 2: GATHER THE REQUIRED INFORMATION
You need to obtain the necessary information that you would put in the statement of changes in equity. The information primarily contains the opening balances of share capital, retained earnings, reserves, profit for the year as per the income statement, issues and deductions in the year, and other items of the SOCE.
STEP 3: MAKE A FORMAT
The format depends on the type of entity but as a general rule, the opening balances are put on top followed by contributions (share and loan note issues) and deductions (ie dividends).
You should structure your format in a way that is understandable for the users of the statement. The best way to do that is to keep it neat and in the sequence; opening balances > contributions > deductions > total.
STEP 4: WRITE OPENING BALANCES
Yes, simple as that. Write the opening balance of share capital, equity options, revaluation reserves, and retained earnings. These balances can be found easily because they are merely the closing balances of the prior year or period.
STEP 5: WRITE CONTRIBUTIONS MADE DURING THE PERIOD
Contribution simply means newly added capital during the period which includes shares issued, loan notes issued, etc… These contributions are added up with the opening balances. In our example, here’s how we have written the loan note contribution that has occurred during the period.
STEP 6: SUBTRACT DEDUCTIONS MADE DURING THE PERIOD
Deductions are simply the dividends paid during the period for companies and drawings made during the period for sole proprietors. These are written in a negative form because these are subtracted later on in arriving at the total figure. Our example does not include deductions so I will write it down on a table to make it easier for you to understand.
| Dividends Paid during the period | (2300) |
STEP 7: ADD INCOME FOR THE YEAR
The income figure is taken from the income statement, also known as the statement of comprehensive income. It also includes the retained earnings figure and that too is added in the format.
STEP 8: CALCULATE THE CLOSING BALANCE
Add up the income and contributions with the opening balance and deduct the deductions made during the period to arrive at the closing balances. These closing balances are then carried forward as opening balances for the next period.
PURPOSE & IMPORTANCE OF STATEMENT OF CHANGES IN EQUITY
The statement of changes in equity is important for a number of reasons both for the company and users of the financial statements. The following are some of the reasons why a company prepares a statement of changes in equity.
- Required by the IAS 1 which states that a company must present a separate statement of changes in equity.
- SOCE Lists and statistically explains items in detail that are listed with minor details or not listed at all in other financial statements. These items include contributions made during the period and deductions that occurred during the period.
- In SOCE, the opening and closing balances of the entity are reconciled which describes the changes during the period in detail.
- It helps analysts understand the capital movements of the entity during the period and make decisions accordingly.
TRANSACTIONS INVOLVED
The statement of changes in equity shows details about a company’s assets, liabilities, and equity. That being said, the statement includes transactions that relate to changes in assets, liabilities, and equity of the company. Some transactions that are reported in the statement of changes in equity are:
- The total profit/loss of the shareholders: Taken from the income statement.
- Changes in share capital reserves: Shares and loan notes issued during the period.
- Dividends: Dividends paid to shareholders during the period.
- Changes in Accounting Policies & estimates.
CONCLUSION
The statement of changes in equity is one of the FOUR types of financial statements in which capital contributions and deductions of the period are reported. IFRS 1 requires companies to present the statement separately.
An easy way to prepare the statement of changes in equity is to take opening balances of equity, retained earnings & reserves, and add contributions made during the period. To arrive at the closing balance, deductions that occurred during the period are subtracted/deducted from the sum of opening balances and contributions.
The SOCE is an important financial statement for a number of reasons prime being its explanation of capital movements during the period.
