Updated July 10, 2023
Definition of Shareholder’s Equity Statement
Shareholder’s Equity Statement refers to the Owner’s Equity, which the business owners contribute. After subtracting the liabilities, it is the residual interest in the company’s assets.
It is shown as a part of the company’s Balance Sheet, and it attempts to convey the changes in the value of Shareholders’ Equity during the period, which various stakeholders and analysts closely track. Shareholders’ Equity Statement is a regulatory reporting requirement in many countries.
Explanation
Shareholders’ Equity Statement shows the capital the Common Stock Holders contributed, additional capital infused during the period, earnings retained in the business after adjusting for all the expenses from Net Profits, non-controlling interests, adjustment for Treasury Stocks, dividends, etc. In cases where the Preference Shareholder’s right of entitlement is non-cumulative, they are also shown as part of the Shareholder’s Equity Statement. Further changes affected by the issue of new shares, bonus shares, and rights issues also form part of the Shareholder’s Equity Statement.
Example of Shareholders Equity Statement
Transnational International Limited has furnished the following information. Accordingly, based on the below information, prepare the Shareholders Equity Statement at the end of 31st Dec 2019.
| Particulars | Amount in USD |
| Shareholder Equity as of 01st Jan 2019 | 22000 |
| Shares issued during the year | 7000 |
| Net Profit during 2019 20 | 4000 |
| Dividends distributed during 2019, 20 | 30 percent of Net Profits |
| Treasury stocks purchased during the year not yet retired | 800 |
| Unrealized remeasurement gains not forming part of P&L | 400 |
Solution:
Based on the above, let’s prepare the Shareholders Equity Statement as of the end of 31st Dec 2019
| Closing Balance as on 31.12.2019 | Common Stock | Additional Capital | Retained Earnings | Dividends | Other Comprehensive Income | Treasury Stock | Total |
| Opening Balance as on 01.01.2019 | 22000 | 22000 | |||||
| Shares issued during the year | 7000 | 7000 | |||||
| Dividends paid | -1200 | -1200 | |||||
| Treasury stocks | -800 | -800 | |||||
| Retained Earnings | 2800 | 2800 | |||||
| Unrealized measurement gains | 400 | 400 | |||||
| Closing Balance as on 31.12.2019 | 30200 |
Components
- Contributed Capital: This is the number of shares issued and subscribed by the Common shareholders.
- Preferred Stock: Preferred Stock can be classified as Debt or equity depending upon the right of the preferred shareholders. Under Shareholder’s Equity Statement, preference stocks that are nonredeemable and don’t require mandatory redemption are considered part of it.
- Retained Earnings: This is the residual income left from Net income on a cumulative basis which is not distributed to common shareholders in the form of dividends or buybacks.
- Other Comprehensive Income: This includes income received from the issue of new shares, rights issue, payment of dividends, remeasurement gains and losses not forming part of the P&L Account and reported directly in the Shareholders Equity Statement, etc.
- Treasury Stock: It refers to the stocks acquired by the company for retirement purposes but not yet extinguished. Such stocks don’t carry any voting rights or are entitled to dividends. Also, these shares are deducted for the computation of outstanding shares and are EPS accretive.
Importance
It is an important financial report and provides useful input for various stakeholders.
- Enables capturing the movement of Equity Capital during the period, changes in shareholders’ capital, and the reason for the same.
- It helps determine the earnings retained by the business and treasury stocks purchased.
- Another important role this statement plays is identifying how the business owners contribute to the business. For example, in a tough market economic downturn, business owners infuse additional capital, and a higher amount of retained earnings are plowed back into the business, giving a sense of cushion to other stakeholders.
Items Affecting Shareholders’ Equity Statement
The components that form part are major items that impact Shareholder’s Equity statement. In other words, changes in the capital by way of issuance of new shares, payments of dividends, losses incurred during the year, purchase of Treasury shares, unrealized gains and losses on remeasurement, etc., forming part of the Shareholder’s Equity statement affects it.
Advantages
Some of the advantages are as follows:
- It helps understand the movement of share capital in and out of business easily and concisely.
- It is a regulatory reporting requirement and requires compliance for eligible entities.
- Analyzing the Shareholders’ Equity Statement trend allows one to holistically assess the company’s financial health.
Disadvantages
Some of the major disadvantages are as follows:
- It cannot be reviewed in isolation as it is a supporting document and needs to be analyzed along with other financial statements to understand and interpret.
- It can provide a biased view if not seen in totality. For instance, a higher dividend payout and no retention of profit in the form of Retained Earnings may be considered a negative attribute; however, if the same is seen from the perspective of the non-availability of positive NPV projects within the company, it can be considered as a positive attribute.
Conclusion
Financial Statements are an important source of information for external stakeholders and general shareholders. Shareholders’ Equity Statement is an important financial document that forms part of the company’s financial statements and is closely tracked to understand the business’s equity transactions in capital infusion, dividend outflow, repurchase of shares, etc. Further, this statement also helps analyze owners’ contribution to the business’s total assets as the business assets are funded with a combination of liabilities and Shareholders’ Equity. Declining shareholder’s equity and increasing debt component is a classic sign that external stakeholders to get alert about the prospects of the business, with other things being equal. Thus Shareholder’s Equity is one of the many financial documents which an investor, a potential investor, should review to make informed investment decisions.
Recommended Articles
This is a guide to Shareholder’s Equity Statement. Here we also discuss the definition and components of the shareholders’ equity statement along with its advantages and disadvantages. You may also have a look at the following articles to learn more –
