Statements of Changes in Owners Equity

Scenic Video Transcript

Statements of Changes in Owners’ Equity

Topics

Goal of statements of changes in owners’ equity
New balance sheet concepts:
Retained earnings
Reserves (accumulated other comprehensive income)
Connecting balance sheets to statements of changes in owners’ equity
Connecting owners’ equity change (OEC) map to statements of changes in owners’ equity
Company disclosures (including controlling and non-controlling interests):
Vodafone
América Móvil
AT&T
Take-aways

Transcript

Introduction

Welcome to the Statement of Changes in Owners’ Equity scenic route. This video will help you understand the goal of the statement of changes in owners’ equity and how it relates to the balance sheet and to the OEC map that we discussed earlier in the chapter. Perhaps more importantly, you’re going to learn how to navigate real company’s statement of changes in owners’ equity to locate the information we’ve been studying throughout the chapter. These statements can be rather daunting when you first confront them but by the end of the video, you should be pretty comfortable with them. Here’s our agenda, we’ll start with the goal of the statement of owners’ equity; then we’re going to connect the balance sheets into the statement of changes of owners’ equity; and then we’re going to connect the OEC map into the statement of owners’ equity. And then we’re going to look at the three telecommunications companies that we’ve been examining throughout the chapter.

Goal of SCOE

We begin with the goal. It’s a very simple goal. Imagine yourself studying a balance sheet which is we have here just the owners’ equity section. And you say, “Look, various line items change.” So I see for example, share capital went from $214 to $253 and of course you wouldn’t see this change column, we’ve added that. Well, the goal quite simply of the statement of shareholders’ equity is to say, “Well if you’re interested in why these changes took place, go to the statement of shareholders’ equity because that’s exactly what it’s there for, to help elaborate on this part of the balance sheet.” And in the process of doing it, it’s going to connect the balance sheet and the income statement.

Retained Earnings & Reserves (AOCI)

There’s going to be a couple new items on the balance sheet that are important. One is retained earnings. What is retained earnings? Well, we know that net profits is one of the components of comprehensive income and we know that OCI is the other and we know that net profits are measured over a period. Well, if you were to add up all the net profits ever since the company started, that would give you the cumulative earnings. Well, why do we say retained earnings? Because dividends, which we’ll be looking at later, dividends come out of accumulated earnings and once you’ve add up all of the earnings since this company started and then you subtract all the dividends they paid, well that’s what they’ve retained in the business. And if we think of this from an economic sense, the company could have distributed those earnings but instead it left in owners’ equity. And essentially what management did is on behalf of the owners, they reinvested that money back into the company and they grew owners’ equity as they did that.

If we look at the reserves, the reserves are sort of the analogy but tied to OCI and of course there’s no dividends there. So it just accumulates OCI and keeping in mind that OCI goes up and down, well sometimes it’s adding something and sometimes it’s subtracting something. And the reserves will keep track of various types of OCI and another name for the reserves then is AOCI or Accumulated Other Comprehensive Income. Let’s get started now that we know these balance sheet terms.

Connect BS to SCOE

Now we said that we’re going to look at the changes in the owners’ equity section of the balance sheet, so I’ve just expanded that to start our build for how we’re going to connect balance sheet to the statement of owners’ equity.

Here we have the statement of owners’ equity down here and we’re going to gradually walk into this because it’s a little complicated and most companies are going to use the format we’re describing here and then some companies use an alternative format and it turns out one of the companies we’ll be looking at later uses that alternative format. Most companies are going to take the balance sheet captions, the line items on the balance sheets, and where there are rows on the balance sheet, there are going to be columns in the statement of changes in owners’ equity. So we see here, share capital, retained earnings, reserves and the total -- meaning the total owners’ equity.

Now let’s go one step further. If we look at the statement of owners’ equity down here, we can make one more connection to the balance sheet. The first thing I want you to realize down here is when you look at a statement of owners’ equity we saw that the columns correspond to the rows over here. Well, for most companies what’s going to happen is as you go down into this part of the statement, you’re going to see at least 3 dates, which are balance sheet dates. They actually have here 2 panels, one panel here and one panel here. Now keeping in mind that the objective of the statement is to explain the changes between 2 balance sheet dates then if this is December 31st 2012 and this is December 31st 2013, this bottom panel down here, well that’s the fiscal 2013 changes in the owners’ equity and we’ll explain that in more detail.

And of course, this up here is fiscal 2012, and under IFRS companies must show the changes for 2 years, under U.S. GAAP they have to show it for 3 years, so there would be a third panel for U.S. GAAP and we’re going to see this when we look at real companies. And actually, many, many IFRS companies will also show 3 years. So what we want to get in the habit of is as we’re looking at a statement of shareholders’ equity, we look at our balance sheet -- we actually only have beginning balance and an ending balance. So we have 2 columns and that corresponds to one year, the start of the year and the end of the year or the end of 2 years depending on how you look at it. So when we’re trying to connect numbers on the balance sheet to the numbers on the statement of shareholders’ equity, we want to go down to the bottom panel for most companies. And there can be either 2 panels or sometimes 3 panels, that’s the most important thing so far and we’ll talk about all the things that are in that bottom panel in just a minute.

Here’s the final step, here’s our balance sheet from the rows on the balance sheet we got the columns and the statement of shareholders’ equity and then we got the beginning balances and the ending balances and those will exactly be the same as the balance sheet. So if you took for example the share capital at the beginning of the year, that is December 31st 2012, here’s our share capital. It’s $214 and there’s $214 there. And at the end of the year it was $253 and you can do that for every account. You could have got all that off the balance sheet, right? I mean, that’s exactly what the balance sheet shows you. So what’s different here is the pink. What is that? Well, it’s the change in the balance sheet amounts during the year. We’re going to explain that in great detail and this is a wonderful resource for getting all these insights about why the balance sheet changed. So this will be our primary focus down here and this is what we’re going to get out of the change map.

Connect OEC Map to SCOE

So let’s get started with the change map. How does the change map fill out the statement of owners’ equity? Well, let’s go down here and again get oriented, here’s our columns corresponding to line items on the balance sheet, here’s the panel we’re looking at with the ending balance at the end of the last year there and the ending balance at the end of this year here. So we’re interested in explaining these changes within this panel and we can look at all the various accounts so we’re going to look at share capital. And now we go up to our OEC map and it turns out, we’ve laid out everything in the OEC map as promised, everything we need that’s going to go into the statement. So let’s go back and quickly catch up with what the OEC map does.

It takes the change in owners’ equity which corresponds to the change in the net assets and it breaks it up into two parts. Remember, transactions with owners and then everything else. And we’re going to now focus on that transaction with owners that corresponds to contributions from owners. And if we go down here and trace that number we’ll see, well, common stock issued. So as you’re looking down at the bottom here, you want to read the captions and what the captions are telling you is what caused the change in the corresponding column up here, or, what explains part of the change on the balance sheet for that particular line item. So we see the company issued common stock. That took the share capital beginning balance $214 and it added $10 to it.

And we see there’s other stuff going on. Remember with Bischoff, there are always other events. And so share capital was expanded by $39 and we get our ending balance. Well now what we’re going to do is we’re going to again stay within transactions with owners. We’ve already seen the contributions from owners but we know they subtracted distributions to owners. Let’s look at what some of the distributions are. Dividends declared. Now, we’ll be studying the entry for dividends declared later in the chapter, when we go behind the numbers. But here’s the key thing. A while ago I told you, “What is retained earnings?” Well, retained earnings is basically adding up all the earnings of the company and that we’re going to see very quickly, there they are. Profit (loss) goes right in there and then it subtract the dividends. And here we are subtracting the dividend. Of course there’s always other things that can happen.

So if we take the retained earnings on the balance sheet, here’s the beginning balance on the balance sheet, here’s the ending balance, what changed it? Well, profits went in, dividends came out and some other stuff happened that we have to learn about. So I hope you’re starting to see how powerful this statement is because it gives you all sorts of insights as to why the balance sheet is changing.

And now we’re going to go from transactions with owners to all the other things that led to a change in owners’ equity which is where our focus is. And we know that most of the change is due to comprehensive income. And then comprehensive income gets broken up into two parts: net profit and OCI. And look where profit is going into retained earnings. And by preview, look where OCI is going, it’s going into the reserves.

And again, with beginning balance on the balance sheet, ending balance and we’re explaining why they are changing and you understand why they’re changing because you understand these concepts. And just to round out our picture here, now we see comprehensive income. Well that goes into the total column over here and finally the whole thing. So you can see all the concepts we’ve learned and we start at the last chapter with the balance sheet. There’s our balance sheet. Here’s how our income is coming into the balance sheet. Now, how is this happening? Well, we’re going to show you the entries when we go behind the statement. We’re going to show you the entry for bringing a dividend out of retained earnings, for putting profits into retained earnings and for putting OCI into the reserves and when we put these two in, well the total, just by adding those up, well that will be comprehensive income.

So, now you know the structure of the statement of shareholders’ equity. But when we look at real companies, it’s going to look a little more complicated. However, the structure is essentially going to be the same. So what we have to do when we go to the real companies, we got to be really careful. Just say, “Let’s go look for our structure” and we’re going to do that. And we want you to practice that because you’re got to build your confidence that the structure we’ve taught you for this very simple company is going to work for the more complicated companies. So let’s get started with that.

COMPANY DISCLOSURES

Vodafone

Here we have Vodafone and we’re going to look at Vodafone for quite a while and as a matter of fact for all 3 of these companies for quite a while. And we start with the consolidated statement of financial position, which is just another way of saying balance sheet. And I want to give you an idea what we’re going to get more information on. So here’s their ending balance for 2011 and here’s their beginning balance. Some of these line items we’re going to recognize and some we aren’t. There is called up share capital and additional paid-in capital, these two line items, and you’ll learn this in the later chapter, are essentially what we’ve been calling share capital. And then treasury shares which have to do with repurchasing the company’s shares. And all you need to know right now is that’s a negative number and so it reduces the owners’ equity and we’ll study that in later chapters.

And then retained losses, so instead of retained earnings which would be positive, that is adding up profits, they have retained losses. And that doesn’t mean that company is suffering losses necessarily. It could mean they’ve been paying out a lot of dividends or doing quite a few stock repurchases. What about accumulated other comprehensive income? Well, that’s AOCI. That’s like reserves. It goes either by the name of reserves or accumulated other comprehensive income, those are synonyms, and then the total equity of shareholders’ funds, right here. But remember, that’s for the parent company’s shareholders. There’s also non-controlling interest and then there’s some ugly little thing called “put options over non-controlling interest.” You will rarely see that so there’s no need to talk about it and it’s beyond the scope of this chapter by a long, long way.

So the key thing we want you to carry forward as we look at the statement of shareholders’ equity is that we’re going to have some stuff that deal with controlling interest, most of which we will recognize and non-controlling interest. And let’s look at just a few numbers to carry over in our memory bank. If we look at the total equity shareholders fund row here, the numbers are going to be around 87 and 90 for the total, that is when we add up all of these various accounts right here. So let’s just keep track of that and see what we have. So it was 90, it dropped to around 87. Let’s go forward and look at the statement of shareholders’ equity.

Let’s try to connect these columns back to the balance sheet accounts. So the first we have here is share capital and additional paid-in capital. Those are those first two line items we saw on the balance sheet. And then treasury shares, and then retained losses, remember that?

Now the next thing on the balance sheet was AOCI, Accumulated Other Comprehensive Income. And what they had done here is they broken that out into several different accounts, other comprehensive income, right here, see OCI? They really mean AOCI for Accumulated Other Comprehensive Income but it could be they are referencing the changes during the year which would be OCI. Anyway, they got all the various varieties of OCI and they’re showing them separately in the statement of shareholders’ equity whereas they accumulated them on the balance sheet. And then they got equity shareholders’ funds, remember that? That was that numbers that I told you to keep track of in your mind. And then we got the non-controlling interest and when we add the controlling interest, which is over here, to the non-controlling interest, we get the total change in equity.

So these are all corresponding to balance sheets with a little bit more given for the AOCI accounts. And we told you it would be messy. Look at how messy it is.

Now, what the next thing we have to do? Well, we have to identify those panels that we mentioned earlier that correspond to the change for a year. So here we have one balance sheet date, here’s another balance sheet date, so this is one panel and that’s the panel that’s going to end on 31st of March 2009 so it looks like a fiscal 2009. And then a second panel for fiscal 2010 and we told you, most companies, even though under IFRS they don’t have to, are going to give 3 years. And now we’ve color-coded the third panel to help you out a little bit and the color coding goes exactly what we’ve done before. Here are balances at the start of the year, balances at the end of the year and so these are going to correspond to what we saw on the balance sheet exactly and all we got to do is line up the columns.