Regular and accurate reporting is crucial to maintaining good financial health. Yet, while some (like income and cash flow statements) come to mind easily, others are less obvious. A statement of changes in equity is not considered essential by many businesses. Too many companies neglect to carry one out. Yet a statement of changes in equity can be an invaluable tool in providing shareholders with an understanding of equity movement within your company, so they can make prudent and informed decisions.
Here, we’ll look at everything you need to know about your statement of changes in equity, why they’re important, and how to prepare one.
What is a statement of changes in equity?
A statement of changes in equity is, for many businesses, the missing link between their income statements and their balance sheet. It provides an account of how equity moves through the business throughout the reporting period (usually one year).
The statement begins with the opening equity balance for the period, adding and subtracting items over time such as profits and dividend payments to get to the closing balance for the period. Although it can be added to other types of financial statements, it is usually presented on its own.
The purpose of a statement of changes in equity is to furnish shareholders with information that can further inform their investment strategy. It can be used to identify the par value of common or treasury stocks, clarify retained earnings and strengthen investor trust in your company.
A statement of changes in equity will typically include:
Net profits / losses
Treasury stock purchases
Proceeds from stock sales
Directly recognised gains or losses in equity
Effects of changes in fair value on assets
Effects of corrections of errors in prior periods
Statement of changes in equity formula
If you’re not sure how to prepare a statement of changes in equity, we provide a step-by-step guide below.
However, this formula should provide you with a clear idea of what you need to include in your statement:
Opening Balance of Equity + Net Income – Dividends +/- Other Changes = Closing Balance of Equity
Cover the bases above, and you can be assured that your statement of changes in equity is fit for purpose.
Preparing a statement of changes in equity
Preparing a statement of changes in equity may seem daunting, even with the formula above to guide you.
Fortunately, we have some step-by-step instructions to help you put your statement of changes in equity together:
First, you need to ascertain the value of the equity at the start of the reporting period. This is your statement’s opening balance and should be the same as the closing value of your last reporting period.
Next, you need to work out your net income or losses.
Work out the declared dividend value for the reporting period.
Now take stock of any adjustments made for the reporting period, including changes in share and reserve capital, and the effects of changes in accounting policies or corrected errors made in prior periods.
Finally, determine the closing balance of your equity by adding your net income to your opening equity balance of equity, deducting dividends and making the adjustments outlined above.
Why is your statement of changes in equity important?
Not all businesses go to the trouble of preparing a statement of changes in equity. This may beg the question of whether it’s worth putting one together.
However, your statement of changes in equity should be a mainstay of your annual reporting. It can add context to other financial statements and help shareholders to see what influences gains or losses in equity throughout the accounting period. It can inform and empower, resulting in happier and more motivated shareholders.
We can help
If you’re interested in discovering more about your statement of changes in equity, or any aspect of your business financial reporting, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.