What is a Statement of Changes in Equity and its Purpose?

What is a statement of changes in equity and what is its purpose? A statement of changes in equity is a separate component of financial statements. It presents an entity’s total comprehensive income for the period (profit or loss plus other comprehensive income for the period), the effects of retrospective application (changes in accounting policies and correction of errors for the period), reconciliations between the carrying amounts at the beginning and at the end of the period for each component and items of equity (i.e., profit or loss, other comprehensive income, and transactions with owners). Amounts, such as the dividends recognized as distribution and the related amount per share may also be shown on the face of the statement of changes in equity, otherwise, they are presented in the notes to financial statements. The statement of changes in equity is presented for a period of time or reporting period (e.g., for the year ended June 30, 2011) like the statement of comprehensive income and cash flow statement.

Different forms of equity
Equity or capital can vary depending on the form of a business or entity. For sole proprietorship business, equity is known as owner’s equity or owner’s capital. For partnership, it is known as partners’ equity. For stock corporations, the appropriate term is stockholders’ equity or shareholders’ equity. Sometimes, it is simply called equity. For non-stock non-profit corporations, the term members’ equity or fund balances is used. Thus, a statement of changes in partners’ equity is more appropriate when you are preparing financial statements for a partnership business. Since a stock corporation is a more complex type of entity, the preparation and presentation of its statement of changes in equity is also more difficult, especially for big corporations.

What is the purpose of the statement of changes in equity?
Users of financial statements, who want to have a better knowledge of the equity reported in the statement of financial position (balance sheet), can read and analyze the statement of changes in equity for further understanding. The balance sheet tells the financial condition of an entity as at a period of time, while the statement of income (comprehensive income) shows the financial performance of an entity for a period of time. While these two major components of financial statements present important financial information, those information may become limited. Hence, a separate component of financial statement (i.e., statement of changes in equity) is necessary to prepare for interested users. This statement gives us a presentation of how the equity reported in the balance sheet changes for a period of time or year, that is, from the beginning of the reporting period to the end of the reporting period.

It also shows how the total comprehensive income (profit or loss plus other comprehensive income) shown in the statement of comprehensive income affects the equity of an entity for a period of time. In stocks corporations, the statement of changes in equity also shows the effects of issuance or subscription of shares, acquisition of treasury stock, cash and stock dividends, and other transactions with owners, to ending balance of equity for the reporting period. Thus, users of this statement, especially the owners and investors, can learn about the effects of the company’s performance or operation and other related factors on the wealth or capital vested by them in the business. Users of this statement can also analyze how those capital or fund was utilized and the flows of such capital or equity during the reporting period. In other words, if you are an owner or a part-owner of such business, it is important that you should learn how those transactions and factors affect the money or capital you have put in that business.

To read and download sample audited statements of changes in equity of publicly listed companies in the Philippines, please visit this post.

Reference: International Accounting Standard (IAS) 1