## **Learning Outcomes**

After reading this article, you will be able to explain how share capital, reserves, and dividends are presented in the statement of financial position and statement of changes in equity. You will distinguish between different classes of shares, understand how reserves arise and are shown, account for dividends, and apply these principles to relevant ACCA assessment scenarios.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand the equity section of company financial statements and how changes are recorded. In particular, you should focus your revision on the following syllabus areas:

- The required structure and content of a company’s statement of financial position and statement of changes in equity
- Classification, measurement, and disclosure of share capital, including different share types
- Meaning, types, and presentation of reserves, including share premium and revaluation surplus
- The recognition, measurement, and presentation of dividends
- Impact of share issues, reserve movements, and dividends on equity

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is NOT a component of “equity” as per IAS 1?
   a) Share capital
   b) Share premium
   c) Loan notes
   d) Retained earnings

2. What reserve is created when a company issues shares at a price above their nominal value?

3. True or false? Dividends proposed by the board before the year-end must appear as a liability in the current year’s statement of financial position.

4. Briefly explain the difference between a revenue reserve and a capital reserve.

## **Introduction**

The equity section of a company’s statement of financial position captures the owners’ claim on the net assets. This comprises share capital, reserves, and retained earnings—the core of company reporting and a recurring ACCA FR exam focus.

International Accounting Standards (especially IAS 1 and supporting standards) require clarity in presenting the sources and movements of equity. This clarity supports shareholders, analysts, and other users in evaluating past performance and current funding structure. Understanding the treatment of share capital, reserves, and dividends is essential to accurately prepare and explain company accounts.

> **Key Term: equity**
> The residual interest in the assets of an entity after deducting all its liabilities.

## **Share Capital**

Companies usually raise funding by issuing shares. Each share confers certain rights and is issued at a specified nominal value.

> **Key Term: share capital**
> The part of equity that results from the issue of shares to investors, shown at nominal (par) value.

Ordinary shares typically carry voting rights and the right to a dividend, while preference shares may offer priority in dividends or on wind-up.

When shares are issued at a price above nominal value, the excess is recognised as share premium, a type of capital reserve.

> **Key Term: share premium**
> The amount received by a company on the issue of shares that is above their nominal value. It forms part of equity but is generally not distributable as a dividend.

Shares issued for cash, non-cash, or via bonus/rights issues all affect equity, but have different disclosure rules and implications for reserve movements.

## **Reserves**

Reserves are balances within equity which arise from sources other than share capital. Key categories include:

- **Revenue reserves**: Derived from retained profits; may be available for dividends.
- **Capital reserves**: Created by specific transactions and cannot usually be distributed as dividends (e.g., share premium, revaluation surplus).

Common reserves include:

| Reserve Type        | Typical Source                     | Distributable?           |
| ------------------- | ---------------------------------- | ------------------------ |
| Share premium       | Shares issued above par            | No                       |
| Revaluation surplus | Upward revaluation of assets       | No                       |
| Retained earnings   | Accumulated profits less dividends | Yes (if sufficient cash) |

> **Key Term: revaluation surplus**
> A reserve arising from the revaluation of non-current assets upwards, part of equity but not available for dividend.
>
> **Key Term: retained earnings**
> Accumulated past profits not yet paid out to shareholders or capitalised in other ways, net of dividends and other direct equity movements.

Other reserves that can appear include merger reserves, translation reserves (from foreign currency operations), and fair value reserves.

## **Accounting for Dividends**

Dividends are distributions to shareholders out of a company’s profits. Under IAS 10, dividends are recognised as a liability only when declared and no longer at the discretion of the company.

- **Dividends paid and proposed before the year-end**: Not recognised as a liability until approved by shareholders (unless local law determines otherwise).
- **Interim dividends (declared and paid during the year)**: Deducted from retained earnings when paid.
- **Final dividends (proposed but not yet approved at the reporting date)**: Disclosed in the notes, not shown as a liability.

Dividends do not appear in the statement of profit or loss—they are shown in the statement of changes in equity and deducted from retained earnings.

### **Worked Example 1.1**

**Zellen Co’s trial balance shows retained earnings of \$83,000 at year-end. The board declared an interim dividend of \$8,000 during the year and proposed a final dividend of \$12,000 on 4 April, just after the year-end. How are these dividends treated?**

> **Answer:**
>
> - The interim dividend reduces retained earnings when paid: \$83,000 − \$8,000 = \$75,000 at year-end.
> - The final dividend proposed after the year-end is not a liability or deduction in the statement of financial position; it should be disclosed in the notes.
> - Retained earnings at year-end shown in equity: \$75,000.

### **Statement of Changes in Equity (SOCIE)**

The SOCIE reconciles opening to closing equity, displaying all owner-related changes—share issues, dividends, and reserve movements.

**Example columns in the SOCIE:**
| | Share Capital | Share Premium | Revaluation Surplus | Retained Earnings | Total Equity |
|------------|--------------|---------------|---------------------|-------------------|--------------|
| Opening | X | X | X | X | X |
| Issue | X/X | X | | | X |
| Total Comprehensive Income | — | — | X | X | X |
| Dividends | — | — | — | (X) | (X) |
| Closing | X | X | X | X | X |

### **Worked Example 1.2**

**Evermore Ltd issued 100,000 new \$1 shares at \$1.20 each, paid \$15,000 interim dividends, and recorded a profit for the year of \$85,000. What is the change to share capital, share premium, retained earnings, and total equity?**

> **Answer:**
>
> - Share capital increases by \$100,000 (shares issued at nominal).
> - Share premium increases by \$20,000 ([100,000 × (\$1.20 – \$1)] = \$20,000).
> - Retained earnings: \$85,000 profit – \$15,000 interim dividend = \$70,000 increase.
> - Total equity rises by \$100,000 + \$20,000 + \$70,000 = \$190,000.

### **Handling Other Reserve Movements**

- **Bonus issues**: New shares issued to shareholders, funded from reserves (usually from share premium or retained earnings). No cash inflow—just a transfer within equity.
- **Revaluations**: Surplus goes to the revaluation reserve; if assets are later disposed of, this surplus can be transferred directly to retained earnings (not passed through profit or loss).
- **Rights issues**: Cash shares offered at a discount to market price; split between share capital (nominal) and share premium.

### **Exam Warning**

> A common exam error is to treat final dividends proposed after year-end as a liability, but under IAS 10, these should NOT be recognised as liabilities at the balance sheet date—only disclosed in a note.

### **Revision Tip**

> When preparing SOCIE entries for ACCA FR, remember: only owner transactions (share issues, dividends, reserve transfers) and total comprehensive income appear. Management-initiated movements, like reclassification of reserves or prior period corrections, need special attention for correct presentation.

## **Summary**

Share capital, reserves, and dividends together make up a company’s equity. Correct classification and presentation are essential for transparent, comparable company reporting. Share issues alter share capital and may generate share premium. Reserves arise from profits, asset revaluations, or special transactions, and require clear presentation and explanation. Dividends are deductions from retained earnings only when an enforceable obligation to pay exists at the reporting date. The statement of changes in equity provides a clear record of all changes attributable to owners.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Identify the main components of equity shown in company financial statements
- Explain the distinction between share capital, share premium, and retained earnings
- Describe how reserves arise, distinguishing capital and revenue reserves
- Demonstrate the correct accounting treatment and disclosure of dividends
- Prepare simple statement of changes in equity extracts showing share issues, reserve movements, and dividends
- Recognise how to present and explain movements in equity per ACCA exam requirements

## **Key Terms and Concepts**

- equity
- share capital
- share premium
- revaluation surplus
- retained earnings

Statement of financial position and changes in equity - Share capital, reserves, and dividends