#cfa-level-1 #reading-22-financial-statement-analysis-intro
The statement of changes in equity, variously called the “statement of changes in owners’ equity” or “statement of changes in shareholders’ equity,” primarily serves to report changes in the owners’ investment in the business over time. The basic components of owners’ equity are paid-in capital and retained earnings. Retained earnings include the cumulative amount of the company’s profits that have been retained in the company. In addition, non-controlling or minority interests and reserves that represent accumulated other comprehensive income items are included in equity. The latter items may be shown separately or included in retained earnings. Volkswagen includes reserves as components of retained earnings.
The statement of changes in equity is organized to present, for each component of equity, the beginning balance, any increases during the period, any decreases during the period, and the ending balance. For paid-in capital, an example of an increase is a new issuance of equity and an example of a decrease is a repurchase of previously issued stock. For retained earnings, income (both net income as reported on the income statement and other comprehensive income) is the most common increase and a dividend payment is the most common decrease.
Volkswagen’s balance sheet in Exhibit 3 shows that equity at the end of 2009 totaled €37,430 million, compared with €37,388 million at the end of 2008. The company’s statement of changes in equity presents additional detail on the change in each line item. Exhibit 7 presents an excerpt of the statement of changes in equity of the Volkswagen Group from its Annual Report 2009.
Exhibit 7. Excerpt from Statement of Changes in Equity of the Volkswagen Group for the Period 1 January to 31 December 2009*| Sub-scribed capital | Capital reserves | RETAINED EARNINGS | Equity attributable to shareholders of VW AG | Minority interests | Total equity | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| € millions | Accumu-lated profit | Currency translation reserve | Reserve for actuarial gains/losses | Cash flow hedge reserve | Fair value reserve for securities | Equity- accounted investments | |||||
| ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ |
| Balance at 1 Jan. 2009 | 1,024 | 5,351 | 31,522 | –2,721 | –672 | 1,138 | –192 | –439 | 35,011 | 2,377 | 37,388 |
| Capital increase | 0 | 4 | 4 | 4 | |||||||
| Dividend payment | –779 | –779 | –95 | –874 | |||||||
| Capital transactions involving change in ownership | –76 | –76 | –316 | –392 | |||||||
| Total comprehensive income | 960 | 839 | –851 | –361 | 271 | 30 | 888 | 214 | 1,102 | ||
| Deferred taxes | 247 | 83 | –80 | 250 | –34 | 216 | |||||
| Other changes | –21 | 2 | –18 | 4 | –15 | ||||||
| Balance at 31 Dec. 2009 | 1,025 | 5,356 | 31,607 | –1,881 | –1,274 | 860 | –1 | –409 | 35,281 | 2,149 | 37,430 |
| 28,902 | |||||||||||
*Numbers are as shown in the annual report and may not add and cross-add because of rounding.
In Exhibit 7, the sum of the line items total comprehensive income (€1,102 million) and deferred taxes (€216 million) equals the amount of total comprehensive income reported in the statement of comprehensive income, except for a rounding difference. Using the balance at 31 December 2009, the sum of the columns accumulated profit through equity-accounted investment equals the amount of retained earnings on the balance sheet (€28,901 million in Exhibit 3), except for a rounding difference. Dividends (€779 million) are reported in this statement and reduce retained earnings. Explanatory notes on equity are included in the notes to the consolidated financial statements. The next section describes the cash flow statement.