The Statement of Changes in Equity

Overview

Equity represents the owners' interests in the company. An alternative way of defining it is that it represents what is left in the business when it ceases to trade, all the assets are sold off and all the liabilities are paid. This can then be distributed to the equity holders (ordinary shareholders).

It is made up primarily of share capital (including share premium) and reserves. The main reserves are the revaluation reserve and retained earnings.

Revaluation reserve

This is created to recognise the gain made when non-current assets are revalued. The gain is not real so cannot be included in the profit reserves of the business. However, the gain would still form part of the value repaid to the equity holders if the business were sold off at that point in time.

Retained earnings

This represents the sum total of all the profits and losses made by the business since its incorporation and that have not yet been paid to shareholders as a dividend.

As these elements are particularly relevant to shareholders (it helps them value their wealth or 'share of the pie') it is important to ensure the shareholders understand any movements in these balances. For this reason a statement of changes in equity is required. It summarises the opening and closing positions on all these accounts and identifies the reason for the movements in between the two periods.

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