Financial Reports: Statement of Income, Compre- Compre-hensive Income and Changes in Equity
Chapter 3 Learning Objectives
3.5 Statement of Changes in Equity (IFRS) and Statement of Retained Earnings (ASPE)Retained Earnings (ASPE)
Basic earnings per share represent the amount of income attributable to each outstanding common share, as shown in the calculation below:
Basic earnings per share (EPS)= Net income − preferred dividends Weighted average number of
common shares outstanding
The earnings per share amounts are not required for ASPE companies. This is because ownership of privately owned companies is often held by only a few investors, compared to publicly-traded IFRS companies where shares are held by many investors.
For IFRS companies, basic earnings per share excludes OCI and any non-controlling interests.
EPS is to be reported on the face of the statement of income as follows:
• Basic and diluted EPS from continuing operations
• Basic and diluted EPS from discontinued operations, if any
The term basic earnings per share refers to IFRS companies with a simple capital structure consisting of common shares and perhaps non-convertible preferred shares or non-convertible bonds. Reporting diluted earnings per share is required when companies hold financial instru-ments such as options or warrants, convertible bonds, or convertible preferred shares, where the holders of these instruments can convert them into common shares at a future date. The impact of these types of financial instruments is the potential future dilution of common shares and the effect this could have on earnings per share to the common shareholders. Details about diluted earnings per share will be covered in the next intermediate accounting course.
A video is available on the Lyryx site. Click here to watch the video.
A video is available on the Lyryx site. Click here to watch the video.
3.5 Statement of Changes in Equity (IFRS) and Statement of
3.5. Statement of Changes in Equity (IFRS) and Statement of Retained Earnings (ASPE) 57
detail any changes in retained earnings that took place during the reporting period in the statement of retained earnings. An example of a statement of retained earnings is that of Arctic Services Ltd., for the year ended December 31, 2020.
Arctic Services Ltd.
Statement of Retained Earnings For the Year Ended December 31, 2020
Balance, January 1, as reported $ 250,000
Cumulative effect on prior years of retrospective application of changing inventory costing method from FIFO
to moving weighted average
(net of taxes for $5,400) 12,600
Correction for an overstatement of net income from a prior period
due to an ending inventory error (net of $3,000 tax recovery) (7,000)
Balance, January 1, as adjusted 255,600
Net income 80,500
336,100
Cash dividends declared $(75,000)
Stock dividends declared (60,000) (135,000)
Balance, December 31 $ 201,100
As discussed at the beginning of this chapter, any error corrections from prior periods or allowable changes in accounting policies will result in a reporting requirement to restate the opening retained earnings balance for the current period. Each error and change in accounting policy item is separately reported, net of tax, with the tax amount disclosed. The retained earnings opening balance is restated and a detailed description is included in the notes to the financial statements. The journal entry for the two restatement items for Arctic Services would be:
General Journal
Date Account/Explanation PR Debit Credit
Inventory . . . . 18,000
Income tax payable . . . . 5,400 Retained earnings . . . . 12,600
General Journal
Date Account/Explanation PR Debit Credit
Retained earnings . . . . 7,000 Income tax payable . . . . 3,000
Inventory . . . . 10,000
The statement of retained earnings also includes any current period net income or loss fol-lowed by any cash or stockdividends declared by the board of directors. This detail provides important information to investors and creditors regarding the proportion of net income that is distributed to the shareholders through a dividend compared to the net income retained for future business purposes such as investment or expansion.
ASPE companies may choose to combine the statement of income and the statement of retained earnings. In this case, the statement of retained earnings is incorporated at the bottom of the statement of income, starting with net income as shown in a simple example below:
Net income $$$
Retained earnings, January 1 $$$
Dividends declared $$$
Retained earnings, December 31 $$$
For IFRS companies, net income is closed out to retained earnings, and other comprehensive income (OCI), if any, is closed out to accumulated other comprehensive income (AOCI). An example of how that works is illustrated in the Wellbourn financial statements included in section3.3of this chapter. Both retained earnings and AOCI are reported in the equity section of the statement of financial position (SFP) and the statement of changes in equity (IFRS).
For IFRS companies, each account from the equity section of the SFP is to be reported in the statement of changes in equity. The following is an example of the statement of changes in equity for an IFRS company, Velton Ltd., for the year ended December 31, 2020. Note how this statement is worksheet style, which discloses each retrospective adjustment net of tax, followed by a restatement of the equity account opening balances. Each equity account opening balance is then reconciled to its respective closing balance by reporting the changes that occurred during the year, such as the issuance/retirement of shares, net income, and dividends. The statement also must report total comprehensive income. Any non-controlling interest would also be reported (as a separate column), the same as was required and illus-trated for Toulon Ltd.’s statement of income presented earlier.
3.5.StatementofChangesinEquity(IFRS)andStatementofRetainedEarnings(ASPE)59
Velton Ltd.
Statement of Changes in Equity for the year ended December 31, 2020
Accumulated Other Preferred Common Contributed Retained Comprehensive
Shares Shares Surplus Earnings Income Total
Balance, January 1 $100,000 $500,000 $15,000 $ 450,000 $ 22,000 $1,087,000
Cumulative effect on prior years of retrospective application of changing inventory costing method from FIFO to moving weighted average
(net of taxes for $15,000) 35,000 35,000
Correction for an overstatement of net income from a prior period due to an ending inventory error
(net of $6,000 tax recovery) (20,000) (20,000)
Balance, January 1, as restated 100,000 500,000 15,000 465,000 22,000 1,102,000
Total comprehensive income:
Net income 125,000 125,000
Other Comprehensive Income –
unrealized gain — FVOCI investments** 3,500 3,500
Total comprehensive income 125,000 3,500 128,500
Issuance of common shares 100,000 100,000
Dividends declared (50,000) (50,000)
Balance, December 31 $100,000 $600,000 $15,000 $ 540,000 $ 25,500 $1,280,500
** net of related tax of $800. May be reclassified subsequently to net income or loss
The equity portion of the SFP is shown below.
Velton Ltd.
Statement of Changes in Financial Position Shareholders’ Equity Section
December 31, 2020 Shareholder’s equity
Paid-in capital:
Preferred shares, non-cumulative, 2,000 authorized;
1,000 issued and outstanding $ 100,000
Common shares, unlimited authorized;
20,000 issued and outstanding 600,000
Contributed surplus 15,000
715,000
Retained earnings 540,000
Accumulated other comprehensive income 25,500
Total shareholders’ equity $1,280,500
If the company sustained net losses over several years and retained earnings were insufficient to absorb these losses, retained earnings would have a debit balance and would be reported on the SFP as adeficit.
A video is available on the Lyryx site. Click here to watch the video.