The Statement of Changes in Equity reconcile the equity of the company during a accounting period. This is the reconciliation of Opening and Closing equity balances. Every company prepare this statement as a part of the financial statement and prepare it annually. Hence, this statement is not considered as the mandatory part of the monthly financial statements.
It is started with opening equity balance, and then adds the profits and subtracts the dividend payments to get closing equity balance. The formula of Statement of Changes in Equity is:
Opening Equity balance + Net profit during the period – Dividends (+/-) Other Changes = Closing balance of Equity.
Shareholders equity movement over an accounting period are as follows:
- Net profit or loss after tax during the income year attributable to shareholders
- Share Capital reserve whether increases or decreases
- Dividend Payments to shareholders
- Gains or losses recognized directly in equity
- Effect of changes in accounting policies
- Correction of prior period errors
Components of Statement of Changes in Equity
The components of Statement of Changes in Equity are as follows:
- Opening Balance of shareholders’ equity reserves
- Effect of changes in accounting policies
- Effects of correction of prior year error
- Restated balance
- Changes in Share Capital during the period
- Dividends payments during the period
- Income/loss during the period
- Changes in revaluation reserve
- Other Gains /losses made during the year
Process for preparing Statement of Changes in Equity
Opening Balance of Shareholders Equity Reserve:
This states the beginning balance of shareholders’ equity reserves at the start of the reporting which is stated prior year’s financial statement. The beginning balance is unadjusted and this balance can be rectified in the current period.
Effect of Changes in Accounting Policies:
As changes in accounting policies are applied retrospectively, an adjustment o be given in shareholders reserves at the beginning of the comparative reporting period to restate the opening equity if the new accounting policy always applied.
Effect of Correction of Prior Year’s Errors:
Prior year’s correction must be presented separately in the statement of changes in equity as an adjustment to opening reserves. The effect of corrections may not be netted off against the opening balance of the equity reserve to reconcile easily the current year’s amount with previous year’s financial statements.
This represents the equity attributable to stockholders at the start of the comparative period after the adjustments in respect of changes in accounting policies and correction of prior period errors as explained above.
Changes in Share Capital:
Newly issued share capital during the period must be added in the statement of changes in equity and redemption of shares must be deducted therefrom. Issuance of shares and redemption of shares must be presented separately for share capital reserve and share premium reserve.
Dividend paid or announced by the company during the period must be deducted from shareholders equity.
Income / Loss for the period:
Net profit made during the period will be added and net loss incurred during the period will be deducted from the statement of changes in equity.
Changes in Revaluation Reserve:
Revaluation gains and losses recognized during the period must be presented in the statement of changes. When revaluation gains recognized in the income statement due to reversal of previous impairment losses, shall not be presented separately in the statement of changes in equity because this is already incorporated in the profit or loss for the period.
Other Gains & Losses:
Any other gains and losses not recognized in the income statement may be presented in the statement of changes in equity such as actuarial gains and losses arising from the application of IAS 19 Employee Benefit.
This represents the balance of shareholders’ equity reserves at the end of the reporting period as reflected in the statement of financial position.
To prepare Statement of Changes in Equity a company should create separate accounts in the general ledger for each type of equity. Different items are exists in these statement, such as : Share capital, Revaluation surplus, Retained earnings, Common stock etc. For each of the items company have to maintain separate accounts.