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Statement of Changes in Shareholder’s Equity

STATEMENT OF CHANGES IN SHAREHOLDER’S EQUITY

This statement summarizes up the changes of ownership interest in a company. As we have defined earlier, asset = liability + equity. So, statement of changes in shareholder’s equity is meant to described the change of equity during a financial period in more detailed manner. 

In easier term, it lists out the activities that either increase or decrease the value of shareholder’s equity.

Typically, there are several components that you could find in a statement of shareholder’s equity:
1. COMMON STOCK
Ownership stake of a company hold by shareholders. The value of total issued common stocks is normally recorded using the par value (which is the value when the common stock was first issued to the public). For instance, if company XYZ issued 2,000,000 common stock at the par value of RM2. Then the value it recorded in statement will be RM4,000,000. This value is also commonly known as share capital.
2. TREASURY STOCK
This refers to the company buying back its own share from the market. This could happen due to several reasons. First, company is doing very well, hence share buyback. Secondly, it could also happen to prevent hostile takeover. Thirdly, a company might also buyback to support the falling share price. Nevertheless, buyback / repurchase of company stock is considered to be a good sign for investors. A buyback indicates that the company’s management has faith towards their own operations.
3. RETAINED EARNINGS
Retained earnings are obtained by subtracting dividend paid from net income. It refers to the total earnings of a company that are not distributed to the shareholders. For instance, company XYZ earned RM1,000,000 during the year and distributed RM400,000 to shareholders. The leftover RM600,000 is kept and reimbursed back into the company for business expansion. Here, for the year, the retained earnings will be RM600,000. Summing up all annual retained earnings, we could obtain the total retained earnings.
4. OTHER COMPREHENSIVE INCOME
Commonly refer to others unrealized gain / loss. Unrealized gain means that a certain investment has gained in value, but has yet to cash in.

CASE STUDY

Below are a quick view of Hua Yang Berhad’s financial statement.

From balance sheet, we can see that in the equity section, there are only 2 components – share capital (total value of common stocks at par value) and retained earnings.

HUAYANG berhad: total equity in balance sheet

In statement of shareholders’ equity, we can see that in March 2014, the total equity is around RM386k. However, by the end of financial year 2014, the total equity has increased to RM465k. So what happen here?

RM386k (March 2014) + RM110k (retained earning for year 2014) – Rm31k (dividend distributed for 2014) = RM465k (March 2015)

Statement of Changes in Shareholder's Equity

Of course, there are still some harder terms that might appear in this statement, such as bonus issue and ESOS. Nevertheless, this article should serve as the basis for you to understand what is statement of changes in shareholder’s equity. For more complicated terms that might appear, we shall discuss it some other time.

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