Shareholders equity (or just equity) represents the claim of owners against a company. It equals total assets minus total liabilities.
Components of equity include capital contributed by owners, preferred shares, treasury shares, retained earnings, accumulated other comprehensive income, etc.
Capital contributed by owners (common stock or issued capital) represents the amount paid by investors while purchasing the company’s shares who may or may not have a par value (also called stated value).
Companies disclose the number of shares authorized, number of shares issued and the number of shares outstanding.
Preferred shares have a preferred right (over the common stock) in respect of dividends or liquidation proceeds.
These are classified either as equity or as a liability depending on their characteristics. For example, perpetual, non-redeemable preferred shares are classified as equity while preferred shares with mandatory redemption are classified as financial liabilities.
Treasury shares represent a company’s own shares repurchased and held instead of being canceled. A company repurchases shares if it considers them to be undervalued, when it needs shares for employee stock option schemes, wants to limit dilution, etc. Treasury shares reduce equity balance and the number of shares outstanding. These are not entitled to voting rights or dividends and a company may not recognize any gain or loss when reissuing them.
Retained earnings (also called accumulated profit) equals the cumulative amount of earnings not distributed to owners.
Closing retained earnings equals opening retained earnings plus net income for the period minus dividends plus/minus other adjustments.
Accumulated other comprehensive income
Accumulated other comprehensive income (or other reserves): These represent components of total comprehensive income other than net income.
Non-controlling interest (also called minority interest) is the equity interest of minority shareholders in the not-wholly-owned subsidiary companies.
Statement of changes in equity
The statement of changes in equity (also called the statement of shareholders’ equity) presents information about changes in components of equity over a period.
IFRS requires companies to provide information about total comprehensive income, effect of retrospective application of changes in accounting policies, capital transactions and distributions to owners, and reconciliation of carrying amounts of each component at the beginning and end of the year.
US GAAP requires companies to present an analysis of changes in different components of equity.