Statement of Changes in Equity

A statement of retained earnings (and similarly an equity statement, statement of owner's equity for a single proprietorship, statement of partners' equity for a partnership, statement of financial position, and statement of retained earnings and stockholders' equity for a corporation) is a basic financial statement.

The statement explains the changes in a company's retained earnings over the reporting period. They break down changes in the owners' interest in the organization, and in the application of retained profit or surplus from one accounting period to the next. Line items typically include profits or losses from operations, dividends paid, issue or redemption of stock, and any other items charged or credited to retained earnings.

The statements are expected by generally accepted accounting principles and explain the owners' equity and retained earnings shown on the balance sheet, where:

owners' equity = assets − liabilities

Requirements of the U.S. GAAP

A retained earnings statement is required by the U.S. Generally Accepted Accounting Principles (U.S. GAAP) whenever comparative balance sheets and income statements are presented. It may appear in the balance sheet, in a combined income statement and changes in retained earnings statement, or as a separate schedule.

Therefore, the statement of retained earnings uses information from the income statement and provides information to the balance sheet.

Retained earnings are part of the balance sheet (another basic financial statement) under "stockholders equity (shareholders' equity)" and is mostly affected by net income earned during a period of time by the company less any dividends paid to the company's owners / stockholders. The retained earnings account on the balance sheet is said to represent an "accumulation of earnings" since net profits and losses are added/subtracted from the account from period to period.

Retained Earnings are part of the Statement of Changes in Equity. The general equation can be expressed as following:

Ending Retained Earnings = Beginning Retained Earnings − Dividends Paid + Net Income

This equation is necessary to use to find the Profit Before Tax to use in the Cash Flow Statement under Operating Activities when using the indirect method. This is used whenever a comprehensive income statement is not given but only the balance sheet is given.

Requirements of IFRS

IAS 1 requires a business entity to present a separate statement of changes in equity (SOCE) as one of the components of financial statements.

The statement shall show: (IAS1.106)

  1. total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests
  2. the effects of retrospective application, when applicable, for each component
  3. reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:
  • profit or loss
  • each item of other comprehensive income
  • transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control

However, the amount of dividends recognised as distributions, and the related amount per share, may be presented in the notes instead of presenting in the statement of changes in equity. (IAS1.107)

For small and medium enterprises (SMEs), the statement of changes in equity should show all changes in equity including:

  • total comprehensive income
  • owners' investments
  • dividends
  • owners' withdrawals of capital
  • treasury share transactions

They can omit the statement of changes in equity if the entity has no owner investments or withdrawals other than dividends, and elects to present a combined statement of comprehensive income and retained earnings.

See also