Question

Over a two-year period (2014–2016), the price of crude oil on the commodity markets fell from over $100 to under $30 per barrel. While helping consumers at the gas pump, this drastic drop put many companies that explore for, drill, and refine oil into deep financial difficulties. In early 2016 energy giant ConocoPhillips cut its quarterly dividend from 74 to 25 cents per share. About this same time many companies in the European Union cut dividends as they continued to struggle in their efforts to recover from the financial crisis brought on by the Great Recession of 2008. Diversified manufacturer Rolls-Royce announced early in 2016, for example, that it was cutting its dividend for the first time since 1992, citing the need to strengthen the equity section of its balance sheet. What is equity and what purpose does it serve? In what forms is equity disclosed on the balance sheet, and how do companies account for changes in equity? What considerations would you have in mind if evaluating a crude oil’s financial statements? Be specific.

Answer 1

A statement of equity generally summarises the changes in the equity components listed below:

• For each class of contributed equity, the accumulated balance of ‘other comprehensive income’, and ‘retained earnings’.
• In terms of non-cash assets, the increase or decrease in the carrying amount which is distributed to the owners as a result of changes in the fair value of such assets.
• Changes in the equity share capital and other equity during the accounting period of:
  • Changes in accounting policy
  • Prior period errors
  • Total comprehensive income
  • Dividends
  • Transfers to retained earnings (it is the accumulated earnings from the beginning of the operations net of dividends paid or any restatement adjustments)
  • Any other changes
• With respect to changes in other equity, the following are to be disclosed:
  • Share application money – pending allotment
  • Compound financial instrument’s equity component
  • Reserves and surplus such as capital reserve, securities premium reserve, etc.
  • Revaluation surplus
  • Cash flow hedges gain/loss
  • When a financial statement of a foreign operation is translated, the related exchange difference
  • Debt and equity instruments through other comprehensive income etc.
• Changes in other reserves including:
  • Capital redemption reserve
  • Debenture redemption reserve
  • Others – with descriptive information of nature and purpose of each reserve
• Changes due to the re-measurement of defined benefit plans etc.