18.5 Presentation and Disclosure
Previously, we have examined the statement of changes of equity, which is one of the required financial statements under IFRS. Recall that this statement is usually presented in a worksheet format and can contain substantial detail of the various classes of equity accounts.
Recall the various sections of Shareholders’ Equity:
Retained earnings is the accumulation of earnings less any dividends paid. Retained earnings can also include adjustments from prior periods and adjustments that may flow to or from contributed surplus.
Contributed surplus is usually used to designate transactions relating to a corporations share transactions. There are many different transactions that impact contributed surplus including: repurchase/redemption of a companies own shares; forfeited share subscriptions; issue of convertible debt; par value share issue or retirement; liquidating dividends; and financial reorganizations.
Share capital which would include the issue of common and preferred shares.
Accumulated other comprehensive income (recall Intermediate Accounting 1) is the cumulative change in equity that is due to the revenues and expenses, and gains and losses that stem from non-shareholder transactions that are excluded from the calculation of net income.
Consider, for example, this excerpt from the 2021 financial statements of a multinational energy company:
|
Group statement of changes in equity ($ million) |
|||||||||
| Share capital and reserves | Treasury shares | Foreign currency translation reserves | Fair value reserves | Profit and loss account | Total controlling interests | Non-controlling interests | Total equity | ||
|---|---|---|---|---|---|---|---|---|---|
| Balance 1 January 2021 | 40,567 | (15,978) | 3,111 | (525) | 108,421 | 135,596 | 1,259 | 136,855 | |
| Profit for the year | 4,257 | 4,257 | 226 | 4,483 | |||||
| Other comprehensive income | (6,264) | (197) | 2,699 | (3,762) | (21) | (3,783) | |||
| Total comprehensive income | (6,264) | (197) | 6,956 | 495 | 205 | 700 | |||
| Dividends | (3,655) | (3,655) | (166) | (3,821) | |||||
| Repurchases of ordinary shares | (3,187) | (3,187) | (3,187) | ||||||
| Share-based payments, net of tax | 241 | 268 | (297) | 212 | 212 | ||||
| Share of equity-accounted entities’ changes in equity, net of tax | 67 | 67 | 67 | ||||||
| Transactions involving non-controlling interests | 112 | 112 | |||||||
| Balance 31 December 2021 | 40,808 | (15,710) | (3,153) | (722) | 108,305 | 129,528 | 1,410 | 130,938 | |
Note that a number of contributed capital accounts are included, such as the share capital and the capital reserves, along with a deduction for treasury shares. Other reserve accounts with specific purposes, such as fair value reserves (i.e., accumulated other comprehensive income), are also identified and segregated based on their purpose. The company also separately identifies an account for retained earnings, using the title Profit and Loss account. IAS 1: 106 specifies the disclosure requirements of the statement of changes in equity. Key disclosures include total comprehensive income for the period, a reconciliation of the opening and closing balances of each component of equity, including changes due to other comprehensive income and profit or loss, dividends, transactions with owners, and changes due to retrospective adjustments due to error corrections or accounting policy changes. As long as the meaning and purpose of the accounts are clear, companies may use terminology that is not precisely the same as suggested in the Conceptual Framework. Additionally, companies may choose to provide subtotals for certain types of account categories, such as contributed capital or reserves. Contributed capital represents amounts contributed by shareholders, including share capital, share premiums, and contributed surplus balances related to share transactions.
In addition to the statement of changes in equity, the financial statements of this energy company contain a further five pages of explanatory notes, which provide more details of the equity accounts. Some of these details include a breakdown of the features and rights of different classes of share capital, a reconciliation of the six reserve accounts, and details of treasury share transactions. IAS 1 specifically requires the following disclosures either in the statement of changes in equity or in the notes:
- For each class of share capital:
- The number of shares authorized
- The number of shares issued and fully paid, and issued but not fully paid
- Par value per share, or that the shares have no par value
- A reconciliation of the number of shares outstanding at the beginning and at the end of the period
- The rights, preferences, and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital
- Shares in the entity held by the entity or by its subsidiaries or associates and
- Shares reserved for issue under options and contracts for the sale of shares, including terms and amounts
- A description of the nature and purpose of each reserve within equity (CPA Canada, 2016, Accounting, IAS 1: 79).
Disclosure must also be made of the amount of dividends declared during the year, both in total and per share. Paragraphs 134 to 138 of IAS 1 also contain detailed requirements of information to be disclosed regarding the company’s objectives, policies, and processes for managing capital.
The substantial disclosure requirements for equity accounts result from the need to serve one of the primary user groups of financial statements: the investors. When investing in a company, one needs a clear understanding of how capital is structured, the various rights and restrictions of different equity categories, and the impact of dividend payments. The need for this type of information, combined with the complex legal nature of equity instruments, creates substantial disclosure requirements that the professional accountant needs to be aware of when drafting financial statements.
