On statement of changes in equity

By Irene Peter  Atolo, FCA, FCIIN



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My grandpa was a farmer. The major products on his farm were yam, rice, and maize. In addition to that, he reared domesticated animals like goats and sheep. The family compound was big, walled and gated. Every evening, he drove all the animals into the compound and dutifully counted his wealth in them.

Occasionally, a lion may slip into the compound and cart away some of the animals. For this reason, he always insisted that a fire be made inside the compound to prevent the rampaging predators from entering at night.

In other words, he knew his wealth in these various components and ensured that they were protected daily and annually.

In a similar way, the components of equity which include each class of contributed equity, the accumulated balance of each class of other comprehensive income, and retained earnings are reconciled from the opening balances to the closing balances year on year.

This is the requirement of IAS 1, Presentation of Financial Statements and Accounting Policies. The statement requires the presentation of changes in equity showing three main components.

First, total comprehensive income for the period comprising profit or loss and other comprehensive income, showing separately the total amounts attributable to the owner of the parent and non-controlling interest traditionally called minority interest.

For each component of equity, the effects of retrospective application or retrospective restatement are recognized in accordance with IAS 8—Accounting Policies, Changes in Accounting Estimates and Errors.

For each component of equity, a reconciliation between the carrying amount at the beginning and end of the period, separately disclosing changes resulting from: profit or loss, other comprehensive income and transactions with owners in their capacity as owners, showing separately contributions by [and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.

Though most stakeholders hardly use this statement in their analysis; it reflects the focus of IASB (International Accounting Standards Board) on the Statement of Financial Position whereby changes in net assets apart from those arising from transactions of owners such as contributions to or distributions from are gains and losses that measure the performance of an entity.

Changes in equity between two reporting periods must reflect the decrease or increase in net assets without counting contributions from or distributions to owners of equity.

The overall change in equity during the period represents the total of income and expenses; including gains and losses generated by the entity’s activities during the reporting period.

After taking account of total gains and losses and owner’s transactions any other changes must be as a result of previous or prior periods.

IAS 8 requires that retrospective adjustments effect changes in accounting policies to the extent practicable except when the transactional provisions in another IFRS require otherwise.

IAS 8 also requires retrospective adjustments to effect changes in accounting policies to the extent practicable.

However, IAS 1 states that retrospective adjustments and retrospective restatements are not changes in equity but are rather adjustments to the opening balance of retained earnings; except when an IFRS requires retrospective adjustment of another component of equity.

A disclosure is required in the Statement of Changes in Equity of the total adjustment to each component of equity, resulting separately, from changes in accounting policies and from correction of errors. These adjustments should be disclosed for each prior period and the beginning of the period.

The major components of equity are: Share Capital, Retained Earnings and Other Comprehensive Income (OCI) namely: changes in revaluation surplus relating to property, plant and equipment, and intangible assets remeasurements on defined benefit pension plans in accordance with IAS 19;

Gains and losses arising from translating the financial statements of foreign operations, gains and losses arising from investments in equity instruments at fair value through other comprehensive income, gains and losses on financial assets measured at fair value through other comprehensive income;

The effective portion of gains and losses on hedging instruments that hedge investments, measured at fair value through other comprehensive income. For particular liabilities designated as at fair value through profit or loss the number of fair value changes attributable to changes in liability’s credit risk;

Changes in the value of the time, value of options when separating the intrinsic value and time value of an option contract and designating as the hedging instrument only the changes in intrinsic value;

Changes in the value of the forward elements of forward contracts when separating the forward element and spot element of a forward contact and designating as hedging instrument only the changes in the spot element; and changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument and insurance finance income and expenses related to insurance and reinsurance contracts which are excluded from profit or loss in certain circumstances in accordance with IFRS 17—Insurance Contracts.

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