Statement of Changes in Equity
A statement of changes in shareholders equity presents a summary of the changes in shareholders’ equity accounts over the reporting period. It reconciles the opening balances of equity accounts with their closing balances.
There are two types of changes in shareholders’ equity:
- changes that originate from transactions with shareholders such as issue of new shares, payment of dividends, etc. and
- changes that result from changes in total comprehensive income, such as net income for the period, revaluation of fixed assets, changes in fair value of certain investments, etc.
Components of changes in shareholders equity
Typically, a statement of shareholders equity summaries changes in the following equity components:
- Common stock, which represents the legal capital of the company and it equals the product of shares issued and the stated value of each share.
- Additional paid-up capital (also called share premium), which is the excess of paid-up capital over the legal capital. Additional paid-up capital = (issue price – stated price) × total number of shares issued.
- Treasury stock, which represents the value of shares repurchased by the company. It is a contra-account to the paid-up capital.
- Capital reserve(s).
- Retained earnings: accumulated earnings since the start of the company net of dividends paid or any restatement adjustments.
- Gains and losses on cash flow hedge: unrealized portion of change in fair value.
- Gains and losses on available for sale securities: i.e. the unrealized portion of change in fair value.
- Revaluation surplus: represents the effect of revaluation of fixed assets.
Following are the most common changes in shareholders’ equity:
- Issue of new share capital: it increases the common stock and additional paid-up capital component.
- Net income (loss) for the period: it increases (decreases) retained earnings.
- Payment of cash dividends: it decreases retained earnings.
- Purchase of treasury stock: it increases treasury stock component and eventually decreases total net shareholders equity.
- Sale of treasury stock: it decreases treasury stock component and affects retained earnings and additional paid-up capital and ultimately increases total shareholders equity.
- Issue of bonus shares: affects common stock, additional paid-up capital and retained earnings.
- Revaluation of fixed assets: increases revaluation surplus.
- Reversal of revaluation of fixed assets: may decrease revaluation surplus.
- Effect of foreign-exchange translation: increase/decrease in foreign-exchange reserve.
- Effect of changes in value of available-for-sale securities: increase/decrease in available-for-sale securities reserve.
- Restatement of financial statements, for e.g. due to change in accounting principle: changes in retained earnings.
Alumina, Inc. is a company engaged in extraction of Aluminum. The company’s CFO has asked you to prepare a statement of changes in equity for the company for the year ended 30 June 2014.
Following information is available:
- The composition of the company’s shareholders equity as at 1 July 2013 was as follows:
USD in million Common stock, 20 M authorized shares, 5 M issued and outstanding 50 Additional paid-in capital 120 Capital reserves 30 Retained earnings 90 Revaluation surplus 15 305
- On 30 August 2014, the company declared and issued 10% bonus shares. Price per share at the date was $40.
- On 1 September 2014, the company issued 1 million new shares for total consideration of $45 million. The stated price of a common share is $10.
- Profit for the financial year ended 30 June 2014 amounted to $50 million and the company paid dividends totaling $16 million.
- The company is required under law to set a side 10% of net income for the period and credit it to capital reserve.
- 500,000 shares were bought back on 30 December 2014 at $40 per share.
- The company reversed upward revaluation of an asset by $5 million. The revaluation surplus already includes $7 million of such initial upward revaluation.
Statement of shareholders equity is normally prepared in vertical format, i.e. the equity components appear as column headings and changes during the year appear as row headings.
Following is the statement of shareholders equity for Alumina, Inc. for financial year ended 30 June 2014. Each change is explained in the notes below:
|Statement of Shareholders Equity|
|for the year ended 30 June 2014|
|USD in million|
|Balance as at 1-Jul-13||50||120||30||-||90||15||305|
|Issue of bonus shares||A||5||15||-||-||(20)||-||-|
|Issue of new shares||B||10||35||-||-||-||-||45|
|Transfer to capital reserve||D||-||-||5||-||(5)||-||-|
|Reversal of revaluation||G||-||-||-||-||-||(5)||(5)|
|Balance as at 30-Jun-14||65||170||35||(2)||99||10||377|
- Issue of bonus share results in increase in the common stock and additional paid-in capital and decrease the retained earnings. Following journal entry is behind this adjustment:
Retained earnings (5,000,000 × 0.1 × $40) $20 million Common stock (5,000,000 × 0.1 × $10) $5 million Additional paid-in capital (20 - 5) $15 million
- When new shares are issued, credit to common stock equals the product of number of shares issued and the stated price of the share. The excess of cash received over the credit to common stock account goes to additional paid-in capital. Following is the relevant journal entry:
Cash (1,000,000 × $45) $45 million Common stock (1,000,000 × $10) $10 million Additional paid-in capital (45 - 10) $35 million
- Net income increases retained earnings.
- Since 10% of profit of the year is transferred to the capital reserve according to the relevant laws, following journal entry is behind the adjustment:
Retained earnings ($50 × 0.1) $5 million Capital reserve $5 million
- Cash dividends decrease the retained earnings.
- Shares repurchased are accounted for by debiting the treasury stock account, which is a contra-account to the shareholders’ equity. Following is the journal entry behind the adjustment:
Treasury stock (500,000 × 40) $2 million Cash $2 million
- This adjustment is only required under IFRS. If a fixed asset is revalued upwards, it increased the asset book value and also increases revaluation surplus, which is a shareholders’ equity component. When the same asset is subsequently revalued down, the downward revaluation is written off to the extent of any upward revaluation originally credit to revaluation surplus in relation to that asset. In this particular case, the asset was revaluated up in earlier year such that a credit of $7 million was made to revaluation surplus. Now, a downgrade revaluation by $5 million can be written off completely against revaluation surplus and hence this decrease in revaluation surplus.