Question

Provide some examples of items that would be adjusted directly against equity, rather than being included as part of profit or loss. (10 marks, maximum 650 words)

Answer 1

Statement of Changes in Equity, often referred to as Statement of Retained Earnings in GAAP, details the change in owners' equity over an accounting period by presenting the movement in reserves comprising the shareholders' equity.

There are some items that directly effect on statement of equity rather than included as part of profit and loss statement:

§ Effect of Changes in Accounting Policies

Since changes in accounting policies are applied retrospectively, an adjustment is required in stockholders' reserves at the start of the comparative reporting period to restate the opening equity to the amount that would be arrived if the new accounting policy had always been applied.

§ Effect of Correction of Prior Period Error

The effect of correction of prior period errors must be presented separately in the statement of changes in equity as an adjustment to opening reserves. The effect of the corrections may not be netted off against the opening balance of the equity reserves so that the amounts presented in current period statement might be easily reconciled and traced from prior period financial statements

§ Changes in Share Capital

Issue of further share capital during the period must be added in the statement of changes in equity whereas redemption of shares must be deducted therefrom. The effects of issue and redemption of shares must be presented separately for share capital reserve and share premium reserve

§ Changes in Revaluation Reserve

Revaluation gains and losses recognized during the period must be presented in the statement of changes in equity to the extent that they are recognized outside the income statement. Revaluation gains recognized in income statement due to reversal of previous impairment losses however shall not be presented separately in the statement of changes in equity as they would already be incorporated in the profit or loss for the period.

§ Dividend payments to shareholders

Dividend payments issued or announced during the period must be deducted from shareholder equity as they represent distribution of wealth attributable to stockholders.

§ Other Gains & Losses

Any other gains and losses not recognized in the income statement may be presented in the statement of changes in equity.

• Net profit or loss during the accounting period attributable to shareholders