Learning Outcomes
After reading this article, you will be able to explain the structure and content of the statement of changes in equity under IAS 1. You will understand the distinction between owner and non-owner changes, how to present comparative figures, and the main requirements for the notes, including disclosures of accounting policies and significant judgements. You should be able to apply these principles to exam scenarios.
ACCA Strategic Business Reporting (SBR) Syllabus
For ACCA Strategic Business Reporting (SBR), you are required to understand the presentation and disclosure framework set by IAS 1, particularly as it relates to the statement of changes in equity and the required notes to the financial statements. This article will help you revise the following points:
- Explain and apply the requirement for presenting a statement of changes in equity under IAS 1.
- Distinguish between changes in equity arising from transactions with owners and non-owners.
- Demonstrate the preparation and presentation of comparative information.
- Outline the required disclosures in the notes, including details of accounting policies, sources of estimation uncertainty, and other mandatory information.
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.
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Which changes in equity must be presented separately in the statement of changes in equity?
- All changes resulting from transactions with owners only
- Only profit or loss for the year
- Both owner and non-owner changes, clearly distinguished
- Only dividends paid and shares issued
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True or false? Under IAS 1, entities must present a statement of changes in equity for both current and comparative periods.
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What key information must be disclosed in the notes regarding accounting policies?
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Briefly explain the purpose of the notes to the financial statements under IAS 1.
Introduction
IAS 1 Presentation of Financial Statements sets out the overall requirements for the presentation of financial statements, including their structure and minimum content. Central to this is the statement of changes in equity, a primary statement showing the movements in equity from both owner and non-owner actions. IAS 1 also details the form and content of the notes, which include critical information such as accounting policies and significant judgements. For Strategic Business Reporting, you must be able to construct, analyse, and critically discuss these disclosures.
Statement of Changes in Equity
The statement of changes in equity presents the movements in each component of equity during the period. IAS 1 requires that all changes, whether arising from transactions with owners (such as dividends or share issues) or from comprehensive income (such as revaluation reserves or actuarial gains/losses), are presented clearly.
Key Term: statement of changes in equity
A primary financial statement showing movements for each component of equity during the period, including profit or loss, other comprehensive income, transactions with owners, and transfers between equity components.
Distinguishing Owner and Non-owner Changes
It is essential to differentiate:
- Owner changes (e.g., share issues, buybacks, dividends) are shown separately.
- Non-owner changes (e.g., profit or loss, other comprehensive income) are also shown as movements within equity.
Each class of equity (e.g., share capital, reserves, retained earnings) must be presented with a reconciliation from the opening to closing balance, for both the current and prior period.
Key Term: owner changes in equity
Changes resulting from transactions between the entity and its owners in their capacity as owners, such as share issues or dividends.Key Term: non-owner changes in equity
Changes in equity arising from sources other than transactions with owners, typically including total comprehensive income.
Required Components
For each component of equity, IAS 1 requires a reconciliation showing:
- Opening balance
- Total comprehensive income for the period
- Transactions with owners (contributions, distributions)
- Transfers between equity components
Comparative figures for the previous period must also be disclosed.
Worked Example 1.1
A company has the following balances at the start of the period: share capital $1,000, revaluation surplus $500, retained earnings $3,000. During the year, it earns a profit of $700, revalues a property upwards by $100, and pays a dividend of $200.
Present the movement in equity for the period.
Answer:
Share capital Revaluation surplus Retained earnings Total Opening $1,000 $500 $3,000 $4,500 Profit $700 $700 Revaluation $100 $100 Dividend ($200) ($200) Closing $1,000 $600 $3,500 $5,100 Each movement is shown in the corresponding equity component, and the sum reconciles opening to closing balances.
Disclosures for Non-Controlling Interest and Dividends
Entities with non-controlling interests in subsidiaries must separately show these within the statement of changes in equity. Dividends declared or paid must be separately disclosed as distributions to owners.
Comparative Information
IAS 1 requires comparative information for all equity components. This ensures users can assess changes over time and perform trend analysis.
The Notes to the Financial Statements
The notes provide essential context and detail for users, supplementing the primary statements. IAS 1 specifies that notes must:
- Present information about the basis of preparation and specific accounting policies used
- Disclose supporting information for items in the financial statements
- Provide other required disclosures, such as judgements, key estimates, and uncertainties
Key Term: accounting policies
The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.Key Term: significant estimates and judgements
Judgements and key assumptions made by management in applying accounting policies and in estimating amounts with a material effect on the financial statements.
Structure and Order
Notes should be presented in a systematic order, generally as follows:
- Basis of preparation and summary of significant accounting policies
- Supporting information for items in the statements (in order of appearance)
- Other required disclosures, including events after the reporting date, related party disclosures, and contingent liabilities
Disclosure of Accounting Policies
An entity must disclose its material accounting policies, as these directly affect the comparison and interpretation of the financial statements.
Disclosure of Estimation Uncertainty and Judgements
Significant assumptions and areas involving a high degree of estimation uncertainty must be explained, so users are aware of the potential impact on assets/liabilities.
Worked Example 1.2
A company provides for inventory at the lower of cost and net realisable value. During the year, management faces significant market volatility and determines the net realisable value for several products involves significant estimation. What must be disclosed in the notes?
Answer:
The company must disclose the accounting policy for inventory, the basis for determining net realisable value, and the fact that significant estimates have been made regarding future pricing. Key assumptions and potential impacts should also be explained.
Other Key Required Disclosures
- Information on capital management
- Nature and purpose of each reserve
- Dividends proposed or declared after the reporting period
- Events after the reporting date not reflected in the financial statements
Exam Warning
In the exam, do not treat the notes as generic boilerplate. Always specify which accounting policy, estimate, or item is being explained, and why it is material in the scenario.
Summary
The statement of changes in equity under IAS 1 provides a clear summary of the movements in all elements of equity, separated between owner and non-owner changes and supported by comparatives. The notes to the financial statements form an essential part of disclosure, explaining the basis of preparation, key policies, significant estimates, and supporting each figure in the statements. Effective disclosure is essential for transparency and comparability.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the structure and purpose of the statement of changes in equity under IAS 1
- Distinguish owner and non-owner changes to equity
- Present and explain the reconciliation for each equity component with comparatives
- Identify and outline mandatory disclosures in the notes, including accounting policies and significant estimates
- Describe the required order and structure of the notes to the financial statements
Key Terms and Concepts
- statement of changes in equity
- owner changes in equity
- non-owner changes in equity
- accounting policies
- significant estimates and judgements