Here’s a detailed explanation of Equity items on the Balance Sheet as per IFRS:
What is Equity?
Equity represents the residual interest in an entity's assets after deducting liabilities. It reflects the ownership stake of shareholders or owners in the business.
The accounting equation is: Equity = Assets - Liabilities
Components of Equity
- Share Capital
Represents the value of shares issued by the company to its shareholders. Types:
Ordinary Shares: Basic ownership shares with voting rights and dividends.
Preference Shares: Shares with fixed dividend rights, often without voting rights.
- Share Premium (or Additional Paid-In Capital)
The amount received from shareholders over and above the nominal (par) value of the shares.
- Retained Earnings
Accumulated net profits or losses that have not been distributed as dividends. It is reinvested in the business. Formula: Retained Earnings = Beginning Balance + Net Income - Dividends
- Other Reserves
Includes various types of reserves created for specific purposes: a. Revaluation Reserve: Gains from the revaluation of assets (e.g., property). b. Translation Reserve: Gains or losses from translating financial statements of foreign operations into the reporting currency. c. Hedging Reserve: Changes in the fair value of hedging instruments designated for cash flow hedges. d. Fair Value Reserve: Unrealized gains or losses on financial assets classified as fair value through other comprehensive income (FVOCI).
- Other Comprehensive Income (OCI)
Items of income or expense not recognized in profit or loss. Examples:
Changes in revaluation surplus
Actuarial gains or losses on defined benefit plans
Foreign currency translation differences
- Treasury Shares
Represents the company’s own shares that have been repurchased but not yet canceled or reissued. Treasury shares are deducted from equity.
- Non-Controlling Interest (NCI)
The equity attributable to minority shareholders in subsidiaries where the parent company does not own 100%.
- Capital Contribution by Owners
Contributions made by owners other than share capital, such as additional injections of capital.
- Dividends Payable
Declared dividends not yet paid are recorded as a deduction from retained earnings and shown as a liability until payment.
Key IFRS Requirements for Equity
- Presentation:
Equity components must be clearly presented in the Statement of Financial Position and explained in the Statement of Changes in Equity.
- Disclosure:
Share capital details (e.g., number of shares authorized, issued, and outstanding).
Nature and purpose of reserves (e.g., revaluation or translation reserves).
Movements in each equity component.
- Measurement:
Share capital is recognized at nominal or par value, while share premium is recognized at the amount received above par.
Other reserves and OCI are measured according to the underlying items (e.g., fair value adjustments).
By properly classifying and presenting equity items, businesses ensure transparency and meet IFRS compliance.
