STATEMENT OF CHANGES IN

EQUITY
 Statement of Changes in Equity

• It is a formal statement that shows the movements in the elements or components of the shareholders’ equity.

• It shows the events and transactions that took place during a reporting period that affect the equity.
• The final figures of these equity components are presented in the statement of financial position under the
equity portion.
 Information to be Presented on the Face of the
Statement of Changes in Equity (IAS 1)

• Total Comprehensive income for the period showing separately the amounts due to owners of the parent and
to non-controlling interests;
• For each component of equity, the effect of any retrospective application or retrospective restatement as a
result of a change in accounting policy or correction of prior period errors.
• For each component of equity, a reconciliation of the carrying amount at the beginning and the end of the
period, separately disclosing changes resulting from:
• Profit or loss
• Each item of comprehensive income
• Transactions with owners in their capacity as owners, showing separately contribution from and
distributions to owners.
Proforma of Statement of Changes in Equity
Share Share Other Retained
Capital Premium Comprehensive Earnings
Income
Balances, December 31, 2018 PXX PXX PXX PXX
Correction of prior year profit due to
overstatement of depreciation (net of tax)
XX
Cumulative effect of change in accounting
policy (net of tax) XX
Corrected Balance, January 1, 2019 PXX PXX PXX PXX
Changes in equity for 2019:
Issuance of share capital XX XX
Profit for the year XX
Dividends declared (XX)
Balances, December 31, 2019 PXX PXX PXX PXX
 Change in Accounting Policy

Accounting Policies - are the specific principles, bases, conventions, rules and practices in preparing and
presenting financial statements.
An entity shall change an accounting policy only if the change (paragraph 14, IAS 8)
• Is required by an IFRS; or
• Results in the financial statements providing reliable and more relevant information about the effects of
transactions, other events or conditions on the entity’s financial position, financial position or cash flows.
A change in accounting policy may be:
• Involuntary change in accounting policy
• Voluntary change in accounting policy
 Accounting Treatment for Changes in
Accounting Policies

• For Involuntary Change in Accounting Policy, the change shall be accounted as follows:
a. If the new accounting standard provides a transitional provision, the enterprise has to follow the
transitional provision.
b. If the new standard does not provide a transitional provision, the change shall be treated retrospectively,
unless it is impracticable to so.
• For Voluntary Change in Accounting Policy, the change shall be accounted retrospectively, adjusting the
opening balance of each affected component of the equity for the earliest period presented and other
comparative amounts disclosed for each prior period as if the new accounting policy has always been applied,
unless it is impracticable to do so.
 • Are omissions from, and misstatements in the entity’s
financial statements from one or more prior periods arising
from a failure to use, or misuse of reliable information that
was available when financial statements for those periods
were authorized for issue and could reasonably expected to
have been obtained and taken into account in the preparation
and presentation of those financial statements.
• Such errors include the effects of mathematical mistakes,
Prior Period mistakes in applying accounting policies, oversights or
misinterpretation of facts, mistakes in recognition,
Errors measurement and disclosures in the elements of financial
statements (IAS 8).
 Classification of Errors

Income Statement Error

Balance sheet Error

Combined Income Statement and Balance Sheet Error

 Counter-balancing Errors – are those errors which if not
detected will automatically be corrected in the following
accounting period. They correct themselves over two
periods.
Examples:
• Overstatement/Understatement of
inventory including sales and
Classification of
Combined Income purchases
Statement and Balance • Failure to record prepaid expenses
Sheet Errors • Failure to record accrued income
• Failure to record deferred income
• Failure to record accrued expenses
 Non-counterbalancing Errors – are
those errors which if not detected, are not
automatically corrected in the next
accounting period.

Example: Failure to record depreciation

expense during the period
 • An entity shall correct material prior period errors
retrospectively in the first set of financial statements authorized
for issue after their discovery by (paragraph 42, IAS 8):
a. restating the comparative amounts for the prior period(s)
presented in which the error occurred;
b. Restating the opening balances of assets, liabilities and
equity for the earliest prior period presented if the error
Accounting occurred before the earliest period presented.
Treatment of • Potential current period errors discovered before the issuance of
PRIOR PERIOD the financial statements are immediately corrected.
ERRORS
 Illustrative Problem 1

ABC Corporation reported profit for the years 2017, 2018 and 2019 at 200,000, 300,000 and 400,000
respectively. Your audit of the company’s accounts disclosed that the following were not recorded at year
end:
2017 2018 2019
Prepaid expenses 10,000 15,000 20,000
Unearned income 5,000 8,000 10,000
Accrued expenses 12,000 14,000 15,000
Accrued income 7,000 8,000 9,000
In the course of your audit, you noted also that in 2018, the inventory was overstated by
15,000. Depreciation of 15,000 for 2017 was also overlooked.

Required:
1. Determine the corrected profit for the years 2017, 2018 and 2019?
2. What is the net adjustment to retained earnings as of January 1, 2019?
Illustrative Problem 2

The Gloria Corporation’s comparative statements of comprehensive income for the years 2020 and 2019 are
presented below:
2020 2019
Sales 1,000,000 720,000
Cost of Sales 600,000 450,000
Gross Profit 400,000 270,000
Other Operating Income 80,000 30,000
Total Income 480,000 300,000
Less: Selling and Administrative Expenses 280,000 190,000
Profit from Operations before Interest and Income Tax 200,000 110,000
Interest Expense 80,000 20,000
Profit 120,000 90,000
 Illustrative Problem 2

The following errors were discovered:

• The following had been overlooked by the company at the end of 2020 and 2019:
2020 2019
Unearned commission income 6,400 8,000
Prepaid rent 21,000 16,000
Accrued interest receivable 12,000 8,000
Accrued wages expense 22,000 25,000

• Advances of P90,000 received from customers in 2020 were credited to Sales although deliveries were made only in 2021.
• Purchase of merchandise, P15,000, shipped FOB destination in December 2019 and received by the company in 2020 were
recorded as purchases in 2019, because the supplier’s invoice was received in 2019. The goods, however, were omitted from
2019 ending inventory.
 Illustrative Problem 2

• The company installed equipment on its administrative office on July 1, 2019. Installation cost of P20,000
was recorded by the company as an expense. Depreciation is computed using the straight line method over a
useful life of 5 years, rounding to the nearest month.

• Required: Prepare corrected comparative statements of comprehensive income for the years ended
December 31, 2020 and 2019.
 Illustrative Problem 2 - Solution

• Audit adjustments to correct 2019 financial statements:

 Other operating income 8,000
Unearned commission income 8,000

• Prepaid rent 16,000

Selling and administrative expenses 16,000

• Interest receivable 8,000

Other operating income 8,000

• Selling and administrative expenses 25,000

Wages payable 25,000

• Accounts payable 15,000

Cost of Sales 15,000
 
 Illustrative Problem 2 -Solution

• Equipment 20,000
Selling and administrative expenses 20,000

• Selling and administrative expenses 2,000

Accumulated depreciation 2,000
 Illustrative Problem 2 - Solution
Audit adjustments to correct 2020 financial statements:
• Retained earnings 8,000
Other operating income 8,000

• Other operating income 6,400

Unearned commission income 6,400
• Selling and administrative expenses 16,000
Retained earnings 16,000
• Prepaid rent 21,000
Selling and administrative expenses 21,000
• Other operating income 8,000
Retained earnings 8,000
 
 Illustrative Problem 2 - Solution
• Interest receivable 12,000
Other operating income 12,000
• Sales 90,000
Advances from customers 90,000
• Cost of sales 15,000
Retained earnings 15,000
• Equipment 20,000
Retained earnings 18,000
Accumulated depreciation 2,000
• Selling and administrative expenses 4,000
Accumulated depreciation 4,000  
 Illustrative Problem 2- Solution

   
2020   2019
Sales P910,00 P720,000
Cost of Sales 615,000 435,000
Gross Profit 295,000 285,000
Other Operating Income   85,600 30,000
Total Income 380,600 315,000

Less: Selling and Administrative Expenses 276,000 181,000

Net Income from Operations 104,600 134,000
Interest Expense 80,000 20,000
Net Income P24,600 P114,000