Equity Statement

What is an Equity Statement?

An Equity Statement, also known as a "Statement of Owner’s Equity" or "Statement of Changes in Equity," is a financial report that details the changes in a company’s equity during a specific reporting period. This statement highlights the changes in share capital, accumulated reserves, and retained earnings.

The primary components of an equity statement include net income, retained earnings, and share capital. These elements reflect the contributions and accumulated earnings of shareholders, forming a crucial part of the total capital invested in the business—distinct from the capital provided by debt holders.

The equity statement outlines the changes in ownership interest within the organization and tracks the application of retained profits or surpluses from one accounting period to the next. This report is important for investors and stakeholders, as it helps them understand the factors influencing the company’s equity.

In essence, the statement of changes in equity serves as a bridge, connecting the equity sections of the balance sheet at the beginning and end of the period, while also incorporating net income from the income statement.

Understanding Equity Statement

The statement of owner’s equity reports the changes in company equity. The company experiences the effects of these equity changes, whether they stem from earned profits, dividends, equity inflows or withdrawals, losses, or gains, and so do the equity holders.

Equity accounts attributable to an Equity Statement includes:

• Share Capital
  • Preferred Stock
  • Common Stock
  • Treasury Stock
• Additional Paid-in Capital
• Retained Earnings
• Other Comprehensive Income

The equity statement is the same thing as the shareholders’ equity in the balance sheet equation:

Assets = Liabilities + Shareholders’ equity

Finance professionals usually expand the equity statements to equity schedules which are often in a separate financial document.

Equity Statement Items Explained

The list below defines the most common items that appear in the statement of equity.

Share Capital

Contains the capital invested by investors of the company. Investors own the company through shares, either common or preferred stock. Movements or changes in the capital structure and value are captured in the Stockholders’ equity statement.

The subsequent are the three different types of stocks in an equity statement under the share capital umbrella:

1. Common Stock
   • It’s the par value of the stock whenever the company has issued.
   • Common shareholders have voting rights in the company for corporate decision-making, but when it comes to payment, they are the last on the priority list. They are the last ones to be paid after settling liabilities first, then bondholders, then preference shareholders.
2. Preference Stock
   • Enjoys a higher claim in the company earnings and assets than the common shareholders. 
   • They are higher in the priority queue to receive cash dividends or any remaining assets during insolvent events before common shareholders, but the trade-off is that they do not have voting rights.
3. Treasury Stock
   • The dollar amount of shares that the company has bought back.
   • Value of shares repurchased by the company. It acts as a reduction to the share capital. The difference between shares issued and shares outstanding.

Share Capital = Capital at the beginning of the period + Shares issued during the period - Treasury Shares (stock buybacks)

Retained Earnings

Total profits/earnings of the company accumulated over the years which is used to manage the working capital position, procure assets, and repay debt. These are not yet distributed to shareholders and thus “retained" by the company for investing in the business.

A profitable company's retained earnings will show an increasing trend if not distributed to shareholders.

Retained Earnings = Retained Earnings at the beginning of period + Net income - Dividends paid to shareholders

Net Income

Total income earned by the company during the fiscal year after accounting for all operating and non-operating expenses. The value is bridged from the income statement, also commonly referred to as the profit & loss statement, which is prepared at the end of each fiscal quarter or fiscal year.

Dividend Payments

A dividend is a payment made to shareholders as a reward for their investment in the company’s shares. While dividends reduce the shareholders’ equity, their payment is at the company’s discretion and is not mandatory.

Additional Paid-In Capital (APIC)

Sometimes consolidated with the “Common stock” line item in a financial model. APIC depicts excess amounts that investors have paid for stock issuances over the stated par value.

This mostly includes the stock-based compensation that’s been issued due to employees exercising their options. It also includes how much over-par value a company raises in an IPO or other equity offering.

APIC is calculated as:

APIC = Beginning APIC balance +  Stock-based compensation + Stock created by options

You take the balance from last year, add this year’s net income, and subtract how much the company paid out in dividends.

Other Comprehensive Income (OCI)

Informally, the “catch-all” line includes other items that don’t fit anywhere. The effect of foreign currency or exchange rates changing would be here.

OCI captures unrealized gains and losses that are not reported in the income statement.

The unrealized gains and losses also include accumulated revenues and expenses that haven’t been realized at the time of reporting either. Until the investment(s) are liquidated or realized and converted into cash, the amount remains in the OCI account.

Non-Controlling Interest (NCI)

Also known as “minority interests”, NCI refers to an ownership interest in less than 50% of outstanding shares with no direct control over the subsidiary’s decisions. NCI doesn’t have any individual control over corporate decisions or votes whatsoever.

• Direct non-controlling interest
  These types of investors receive comparable allocation of all equity of a subsidiary in both pre and post-acquisition amounts
• Indirect non-controlling interest
  These types of investors receive a comparable allocation of all equity of a subsidiary only post-acquisitions.

Equity Statement Example - Simple

Normally, the beginning equity account and shareholders’ equity balances are stated in the top line.

The equity components that impact equity are listed in the middle with their corresponding changes. The corresponding changes can be aggregated up to the very right column or the very bottom row.

The last row and last column should all aggregate and equal each other in the Total Stockholders’ Equity ending balance.

Equity Statement Example 2 - Prolonged 

In this example, it’s very common for companies to stack multiple dated balances called “blocks”, together. This nulls the use of beginning and ending balances and keeps the statements of stockholders' equity consolidated.

Notice the balance dates stacking up.

To switch it up, preferred stocks are in the equity schedule instead of common stock in this example. The methodologies for both preferred and common stock equity statements are the same.

From top to bottom, the changing amounts are reported in blocks ordered in ascending order from least recent to most recent, until reaching the last dated balance.

The last row and last column should all aggregate and equal each other in the Total Stockholders’ Equity ending balance.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Equity Method
• Explicit Costs
• Financial Statement Notes
• Fraud in Audits
• GAAP Hierarchy