Statement of financial position and changes in equity - Stat...

Learning Outcomes

After studying this article, you will be able to present a statement of changes in equity (SOCIE) in line with IFRS requirements. You will know how to identify components of equity, structure the statement, explain typical movements (e.g. comprehensive income, share issues, dividends), and recognise common disclosure requirements as expected in the ACCA Financial Reporting (FR) exam.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand and apply the presentation of the statement of changes in equity in published financial statements. In particular, you should be able to:

• Recognise the purpose and content of the statement of changes in equity (SOCIE)
• Identify and explain equity components (share capital, share premium, retained earnings, other reserves)
• Present SOCIE in accordance with IAS 1
• Account for movements in reserves, including total comprehensive income, dividends, share issues, revaluations, prior period adjustments, and transfers
• Satisfy exam disclosure and narrative requirements

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following movements is presented directly in the statement of changes in equity and not in the statement of profit or loss?
   1. Depreciation expense
   2. Transfer from revaluation surplus to retained earnings
   3. Issue of long-term loan
   4. Property impairment loss

2. True or false? Dividends proposed after the reporting date are shown as a liability in the statement of financial position and also deducted in the statement of changes in equity.

3. What are the typical columns found in a published statement of changes in equity?

4. Which two reserve movements commonly appear as rows in the SOCIE but not in the profit or loss statement?

Introduction

A published set of financial statements must include a statement of changes in equity alongside the primary statements. The SOCIE provides a structured summary of all movements in each component of equity over the period. These movements can arise from profit generation, other comprehensive income, share issues, revaluations, dividends, and changes in accounting policies or corrections of prior period errors. Proper SOCIE presentation is examined regularly in FR, and candidates must know both the required disclosures and layout.

Key Term: statement of changes in equity (SOCIE)
A primary financial statement that reconciles opening and closing balances for each component of equity, detailing profits, other comprehensive income, share issues, reserves movements, and transactions with owners.

Purpose and Structure of SOCIE

The SOCIE’s role is to show all movements in equity for a reporting period, linking the opening balances to the closing balances of each equity component. According to IAS 1, the SOCIE must clearly distinguish changes resulting from profit or loss, other comprehensive income, share transactions, dividends, and other reserve movements.

Typical columns in a published SOCIE include:

• Share capital
• Share premium
• Revaluation surplus
• Retained earnings
• Other reserves (e.g., fair value or translation reserves)
• Total equity

Rows normally detail:

• Opening balances
• Changes in accounting policy or correction of prior period errors (as restatements)
• Total comprehensive income for the year
• Share issues
• Dividends
• Transfers between reserves
• Closing balances

Key Term: equity
The residual interest in a company’s assets after deducting all liabilities; recognised in components such as share capital, retained earnings, and reserves.

Key Term: other comprehensive income
Items of income and expense not recognised in profit or loss but in equity, such as revaluation gains or certain fair value adjustments.

Content and Disclosure Requirements

IAS 1 mandates that the SOCIE must present for each equity component:

• Opening balance
• Changes from total comprehensive income (both profit for the year and other comprehensive income)
• Effects of retrospective application/restatements (if any)
• Transactions with owners (e.g., share issues, dividends declared and paid)
• Transfers between reserves, if relevant
• Closing balance

Distributions such as dividends reduce retained earnings when declared and paid, but dividends proposed after the year-end are not shown as a liability at the reporting date.

Transfers from revaluation surplus to retained earnings (e.g., additional depreciation on revalued assets) are shown as a direct movement between reserves.

If there is a prior period adjustment (e.g., correction of error or accounting policy change), the opening balances are restated, and an explanation is given in the notes as required by IAS 8.

Worked Example 1.1

Gabriel Co reports the following summary opening balances as at 1 January 20X7:

• Share capital: $200,000
• Share premium: $40,000
• Revaluation surplus: $30,000
• Retained earnings: $160,000

During the year:

• Profit for the year was $48,000
• Other comprehensive income (revaluation gain): $6,000
• Share issue for cash at a premium: $20,000 (nominal), $10,000 (premium)
• Dividends paid: $18,000
• Excess depreciation on revalued asset: $2,000 transferred from revaluation surplus to retained earnings

Required:
Present an extract of the SOCIE for Gabriel Co for the year ended 31 December 20X7 (ignore totals for columns not affected).

Answer:

Worked Example 1.2

Felix Ltd had the following equity details on 1 January 20X8:

• Share capital: $300,000
• Retained earnings: $90,000

During the year, a prior period adjustment was made, reducing the opening retained earnings by $5,000 due to a correction of a material inventory error. The company also declared but did not pay a dividend of $10,000 after the reporting date.

Show the relevant extract for retained earnings in the SOCIE and explain the treatment of the dividend.

Answer:

The SOCIE will show:

• Opening balance (as previously reported): $90,000
• Prior period adjustment (deduction): ($5,000)
• Restated opening balance: $85,000

The $10,000 dividend is proposed after the year-end. As per IAS 10, it is not a liability at the reporting date, nor would it reduce the year-end retained earnings.

Exam Warning

A common mistake is to treat proposed dividends as liabilities before they are approved. For the FR exam, only declared dividends reduce equity—proposed but unapproved dividends are disclosed in the notes, not deducted from retained earnings at year-end.

Summary

The statement of changes in equity provides a reconciliation between opening and closing equity for all components. It details gains and losses, both realised and unrealised, and clearly distinguishes transactions with owners (such as issues of shares and dividends) from other changes (such as total comprehensive income or reserve transfers). Accurate presentation and understanding of which items affect equity directly are essential skills for ACCA FR.

Key Point Checklist

This article has covered the following key knowledge points:

• Describe the purpose and structure of the statement of changes in equity
• Identify the standard columns and required rows in the SOCIE
• Explain presentation and disclosure requirements for dividends, share issues, revaluations, and prior period adjustments
• Distinguish between profit or loss, other comprehensive income, and direct movements between reserves
• Understand the treatment of proposed versus declared dividends in equity

Key Terms and Concepts

• statement of changes in equity (SOCIE)
• equity
• other comprehensive income