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The Statement of Changes in Equity or Statement of Retained Earnings Explained

August 1, 2015 by Ed Becker

The statement of changes in equity is also called the statement of retained earnings in U.S. GAAP. This statement explains the change in owner’s equity during a specific accounting period by detailing the movement of reserves that make up the shareholder’s equity. This statement offers vital information about equity reserves not found anywhere else in the financial statements.

The following elements make up the movement of shareholder’s equity during the accounting period:

  • Net profit and/or loss attributed to shareholders
  • Increase or decrease in share capital reserves
  • Shareholder dividend payments
  • Changes in accounting policy
  • Corrections of prior period errors

The following components are the main elements in the statement of changes in equity:

  • Opening Balance

This is taken from the prior period’s statement of financial position, and is unadjusted. Any adjustments that should be made will be presented separately in the statement of changes in equity; changes in accounting policy and correction of prior period errors.

  • Changes in Accounting Policies

The effects of any changes in accounting policies are reported in the classification. This allows for restatement of the opening equity as if the new accounting policy had always been used.

  • Correction of Prior Period Error(s)

The effects of any prior period errors must be recorded as an adjustment to the opening reserves, not the opening balance so that the current period amounts can be reconciled, and traced to prior period financial statements.

  • Restated Balance

This is the stockholder’s equity after adjustments made due to above changes and corrections.

  • Changes in Share Capital

If there is any further issuance of share capital during the accounting period it must be added to the statement of changes in equity, and redemption of shares must be deducted. These must be recorded separately for share capital reserve and share premium reserve.

  • Dividends

Current period dividend payments or announcements must be deducted from shareholder equity as a distribution of wealth of stockholders.

  • Income or Loss

Stockholder’s profit or loss is reported as taken from the income statement.

  • Revaluation Reserve

Revaluation gains and/or losses during the period are recorded in the statement of changes in equity to the extent that they are recognized outside the income statement. Gains included in the income statement due to reversal of pervious losses are not recorded separately because they would be in the profit and loss for the accounting period.

  • Other Gains and/or Losses

All other gains and losses not in the income statement would be recorded as actuarial gains and losses.

  • Closing Balance

This is the balance of shareholder’s equity reserves at the end of the accounting period.

 

The purpose and importance of the statement of changes in equity allows analysts and reviewers of the financial statements to see the factors of change in owner’s equity during the accounting period. Movements of shareholder reserves can be found on the balance sheet but information detailing equity reserves is not recorded separately in the other financial statements. Examples of this information would include: share capital issue and redemption, effects of changes in accounting policy, correction of prior period errors, gains and losses not reported on the income statement, dividends declared and bonus shares issued within the accounting period.

In the next segment of this series the relationship between financial statements will be discussed in detail.

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