Definition
This statement reconciles the opening balance of each equity component, such as common stock, additional paid-in capital, retained earnings, accumulated other comprehensive income, treasury stock and noncontrolling interest, to its closing balance. ASC 505-10 requires disclosure of changes in the separate accounts of stockholders' equity, either in a statement or in the notes, when a balance sheet and income statement are presented. SEC registrants must provide the analysis under Regulation S-X Rule 3-04.
Why it matters in an audit or review
Equity is audited largely by rollforward. The auditor agrees opening balances to the prior audited statements, net income to the income statement, dividends and share issuances to board minutes and transfer records, and each column and row to the balance sheet. Unusual entries directly to retained earnings are examined for hidden corrections.
Example
Illustrative: opening retained earnings of $1,000,000 plus net income of $400,000 less dividends of $150,000 gives closing retained earnings of $1,250,000. If the balance sheet shows $1,230,000, a $20,000 entry went somewhere else and must be explained.
Common mistakes
- Failing to carry restatement adjustments to opening retained earnings.
- Not tying the share count in the statement to the transfer-agent records.
Sources
- FASB ASC 505-10-50, Equity, Overall, Disclosure
- SEC, Regulation S-X Rule 3-04, Changes in stockholders' equity and noncontrolling interests (17 CFR 210.3-04, ecfr.gov)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error