Statement

of Changes in Equity

To understand the concept of equity.

Equity
u - residual interest in the assets of an entity after deducting the total liabilities.
me - Equity = Total Assets - Total Liabilities
me - net assets
me - subclassified in the statement of financial position as follows:
u - Share capital - contributed by shareholders; equal to the par or stated value
- Share premium - contributed by shareholders in excess of par/ stated value
- Retained earnings - can be unappropriated/ appropriated
u - holders of equity instruments are known as owners.

To know the preparation of statement of changes in equity

To identify the components of equity

Statement of Changes in Equity

u - shows the movements in the elements of the equity
u - items that shall be presented in the statement of changes in equity:
- Comprehensive income for the period.
- For each component of equity, the effects of changes in accounting policies
and correction of errors.
- For each component of equity, a reconciliation between the carrying amount
at the beginning and end of the period, separately disclosing changes from:
- Profit or loss
- Each item of other comprehensive income
- Transactions with owners in their capacity as owners
showing separately:
 - contributions by
- distributions to owners.
me

To identify the items directly affecting Retained Earnings [RE]

Statement of Retained Earnings

u - shows changes directly affecting the retained earnings of an entity.
me - now a part of statement of changes in equity
u - items directly affecting retained earnings:
- Net income or loss for the period
- increases/ decreases retained earnings for the period
- Prior period errors
- adjustment to beginning balance of retained earnings [RE] to arrive
 at corrected balance
- net income prior period understated: error added to RE
- net income prior period overstated: error deducted from RE
- Dividends to shareholders
- dividends declared or paid during the year shall be deducted from RE
- Effect of change in accounting policy
- adjustment to beginning balance of retained earnings [RE]
- net income prior period understated: effect is added to RE
- net income prior period overstated: effect is deducted from RE
- Appropriation of retained earnings.
- appropriation is deducted from unappropriated balance of RE
- if canceled: added back to unappropriated RE
- May be appropriated for the following reasons:
- Legal requirement ie treasury shares
- Contractual requirement ie bond redemption
- Entity policy ie appropriation for contingencies

me
me Two approaches in determining income
- transaction approach [previous chapter]
- Capital Maintenance Approach

u Capital Maintenance Approach

- net income occurs when capital used from the beginning is maintained
me - income is the amount that can be distributed to the owners and be as "well-off"
at the end of the year as at the beginning
me - Difference of the following important in understanding income in this approach:
- Return on capital: excess of original investment
- Return of capital: erosion of capital invested in the entity
me - Two concepts of capital maintenance or well-offness [Conceptual Framework]
- Financial Capital
- Physical Capital

u Financial Capital [Net assets approach]

- monetary amount of the net assets contributed by the shareholders and
the amount of the increase in net assets resulting from earnings retained by the entity.
- traditional concept based on historical cost
- adopted if users of FS are primarily concerned with the maintenance of nominal
invested capital or the purchasing power of the invested capital.
- Under this concept, net income occurs when
the nominal amount of the net assets at the end of the year exceeds the
nominal amount of the net assets at the beginning of the period,
after excluding distributions to and contributions by owners during the
period.
u Physical capital [net assets expressed in terms of current cost]
- quantitative measure of the physical productive capacity to produce goods and services.
- Physical productive capacity based on ie units of output per day or physical capacity
of productive assets to produce goods and services
- Productive assets measured at current cost [maintained so Physical capital is also maintained]
- users adopt if concern is operating capability of the entity [resource fund needed to
achieve operating capability/capacity.
- Under this concept, net income occurs when
the physical productive capital of the entity at the end of the year exceeds the
physical productive capital at the beginning of the period, also after excluding
distributions to and contributions from owners during the period.