Foundations of Management 2 (MG459)

Week 3:
The Fair Value Accounting Model

Dr. Yally Avrahampour

Associate Professor (Education)

29th January 2024

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 Foundations of Management 2: Sessions
Week 1: Making Business Decisions that Commit Capital
Reporting
Week 2: Representing a Firm’s Financial Condition: 1 To users of
Accounts
Week 3: Representing a Firm’s Financial Condition: 2

Week 4: Origins of Management Science Measuring

and
Managing
Week 5: Valuing and Managing Costs
Costs

Week 7: Financial Ratios and Social Return on Investment

Measuring
Performance
Week 8: Balanced Scorecard and Economic Value Added

Week 9: Occupations, Professions and Expertise Management

and the
setting of
Week 10: Individual and Institutional Investors In a Historical Context
standards
relating to
Week 11: Organization and Management Theory governance.
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 Lecture Three Outline
1) Introduction
- Defining “Fair Value” in IFRS 13
- Measuring fair value and the fair value hierarchy

2) Adverse selection arguments in support of Fair Value

3) Critique of the Value Relevance perspective outlined in week 2

- Observed securities market anomalies
- Behavioural arguments supporting Fair Value Accounting

4) The Valuation Perspective and Fair Value Accounting

5) Criticisms of the Valuation Perspective

- Efficient contracting theory and support for historical cost accounting
- Economic consequences

6) Preparation for the Land Securities case: Accounting for Investment

Property

7) Summary
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 Introduction: Measurement of Assets
Assets may be measured in the financial statements at historical cost or at fair value,
as well as at valuation approaches constituting a mix between these two alternatives.

“Historical cost: In historical cost accounting, assets have initially been measured at
their cost on the date they were acquired… In the historical cost system, the accounting
treatment after the date of acquisition depends on the nature of the asset…
• Non-current assets … are valued at historical cost less depreciation. Depreciation
is a measure of the use of the asset over its life.
• Current assets, such as inventories, accounts receivable and cash, usually remain
recorded at historical cost until they are used in the operations of the business or
are sold.

Fair value: Fair value is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date.
• Non-current assets … are held for use in the business and so their fair value
cannot be measured directly through selling them. Instead the reporting entity
must estimate the fair value of an asset of similar type and condition.
• Current assets are used or sold within the reporting period. Their value in a
market can usually be reported relatively easily.” Weetman (2019:39)

Please see Weetman (2019:44) for discussion of measurement of liabilities.

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 Definition of Fair Value in IFRS 13
The International Accounting Standards Board promulgated International
Financial Reporting Standard 13 (IFRS13): ‘Fair Value Measurement’ in
2011.

The standard defines ‘fair value’ as follows: ‘Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date
(an exit price).’

The objective of a fair value measurement, whether there is a market price

available or otherwise remains ‘to estimate the price at which an orderly
transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current market
conditions (ie an exit price at the measurement date from the perspective of
a market participant that holds the asset or owes the liability).’ IFRS 13

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 The Fair Value Hierarchy
The different levels relate to the different inputs that go into the measurement
of fair value.

Level 1 relates to quoted market prices in principle markets for identical

assets and liabilities.

This is also known as ‘Mark to Market’.

Level 2 relates to inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or indirectly.

For example, prices for similar assets in active or inactive markets, or inputs
other than quoted prices, such as interest rates.

Level 3 relates to unobservable inputs. These inputs reflect the assumptions

that market participants would use when pricing the asset or liability, including
assumptions about risk.

This is also known as ‘Mark to Model’.

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 Including Future Estimates in Financial Accounts
- An argument for historical cost accounting is that is excludes estimates
of the future from the statements. Barth (2006) critiques this argument.

- Currently, financial statements combine historical cost and fair value for
accounting for different items, reducing consistency.

- There are many instances in which asset and liability values already
incorporate a view of the future.
- Recall: assets and liabilities are partly defined in terms of future cash flows.
- For example: loans receivable is determined by a bank by forecasting
defaults and assigning a present value to the balance.

- The definition of asset and liability as deriving from past transactions or

events determines which future expectations are included or ignored.
- Thus, some future cash flows are excluded from financial statements
because whether the transaction has occurred is unclear, but still these
contribute to market value of equity.

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Task: You might wish to review the following
further reading:

Barth, M. (2006) ‘Including Estimates of the

Future in Today’s Financial Statements’
Accounting Horizons Vol. 20 No. 3:271-285

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 How do we measure ‘Fair Value’?
- Under idealized conditions three measures of fair value are identical.
- 1) ‘Entry price’ reflects acquisition price.
- 2) ‘Exit price’ reflects sales price.
- 3) ‘Value in use’ reflects the incremental firm value attributable to an asset
and is calculated by assigning a present value to future cash flows.

- In practice, however, these measures of value frequently diverge

- market prices do not exist for most assets.
- Consider the capital assets of firms.
- further, “value in use” is difficult to assess uniformly, since it calculates
present value and requires assumptions of future cash flows and selection
of an interest rate (these topics will be covered in your Finance course).
- market prices for entry and exit differ, sometimes significantly.
- Consider the valuation of financial assets during the financial crisis.

- The trend for the last few decades has been towards increasing
promulgation of fair value accounting standards:
- Accounting for the cost of pension provision,
- Accounting for business combinations
- Accounting for financial instruments.

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 Adverse Selection

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 Akerlof (1970) on Adverse Selection
• Akerlof (1970) uses the market for used cars as an example of
a market characterized by adverse selection.
• Assume that cars are traded in two markets: new and used cars.
• The cars that are traded in these markets may be high quality or
low quality. Low quality cars are called ‘lemons’.

• Adverse selection is a situation in which the seller of a (new or

used) car has more information than a buyer regarding the car.
• In any market the cars (high quality and low quality) sell at the
same price.
• The buyers are unable to distinguish between high quality and
low quality cars, prior to purchase.
• There is information asymmetry: the seller knows more than the
buyer regarding whether the car is high or low quality.
• The probability of the car being high quality is (q) and low quality
is (1-q).
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 Adverse Selection Continued
• Since all cars trade at the same price, a seller might try to sell a low
quality car for the price of a high quality car.
• Consequently, buyers reduce the price they pay for cars by considering the
combined probability of purchasing a high quality or low quality car.

• Assume that a buyer has purchased a high quality new car and
wishes to sell shortly after having purchased it.
• What price can the seller expect to receive?
• P = q x P (high quality car) + (1-q) x P (low quality car)

• The price received by the seller of a high quality used car is both less
than the value of a high quality used car…
• Because information asymmetry entails that the market price paid by buyers for
the average value of cars that are both high quality and low quality.

• … and lower than the true value of a new car, where any buyer takes
into account that the new car may be high or low quality.
• Because this is a used car now and buyers assign a higher probability to it being
a low quality car than they did when the car was sold as new.
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 Implications of and Solutions to Adverse Selection
• Adverse selection entails that owners of high quality cars are
“locked in”.
• Owners of high quality used cars cannot sell them for their true value.
• Consequently, the proportion of low quality, used cars in the market will
increase … and the proportion of high quality, used cars will decline.
• Ultimately, the consequence of adverse selection is that the market will
cease to exist or simply not function as well as it might.

• Solutions to address the adverse selection problem:

• Quality guarantees,
• Warranties and options,
• Brands,
• Licensing,
• Regulation.

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 Adverse Selection and
Financial Accounting Theory
• Adverse Selection ‘is a type of information asymmetry whereby one or
more parties to a business transaction, or potential transaction, have an
information advantage over other parties.’ (Scott & O’Brien 2020:23)

• The key issue for principals (shareholders) is making investment decisions

based on information regarding the firm’s value, when information about
that value is provided by agents (managers).

• The investor’s problem is that insiders of listed companies are equivalent to

sellers of used cars.
• Outside investors will assign a value to securities that reflects investors’
expected losses at the hand of insiders.
• The consequence is that outside investors will exit the market.
• It can become difficult, if not impossible, for firms to raise capital and
ultimately, there is the threat of market breakdown.
• Firms can address this issue through timely, high quality disclosure,
reducing the discretion available to management when selecting
accounting policy. This supports fair value accounting.
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 Task: Please review the following
essential reading:

Akerlof, G. (1970) “The Market for ‘Lemons’:

Quality Uncertainty and the Market
Mechanism” Quarterly Journal of Economics
Vol. 84, No. 3:488-500

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 Reassessing the Value Relevance
Argument for the Historical Cost
Accounting Model

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 The Value Relevance Perspective Re-Assessed
• The value relevance perspective suggests that there is a trade-off between
relevance and faithful representation of accounting reports.

• Value relevance assumes that users of accounts are rational and

sophisticated.

• Consequently, it is argued that users can make use of partial information

provided in financial statements to value companies.
• For example, information prepared according to historical cost or disclosed in the notes to
the accounts.

• But are the assumptions of investor sophistication and rationality and

therefore of market efficiency, reasonable?

• Can investors make accurate assessments of the value of securities using

financial statements that provide partial information?

• Empirical financial accounting research has sought to improve the

usefulness of financial statements to investors relying on historical cost
information.
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 Some Issues with the Historical Cost Model
• The puzzle of post-announcement drift: one would expect
investors to respond quickly to firms’ earnings announcements,
when these announcements contain unexpected news.

• However, better or worse than expected earnings reports are

incorporated into prices over a longer time than expected.
- Why do investors forego the opportunity to earn extra profit by
investing more quickly?
- How might we explain investors’ use of accounting information?

• Lev (1989) and Lev & Zarowin (1999) find that:

- The markets response to good or bad earnings announcements is
quite small. “Only 2% to 5% of the abnormal variability of narrow-
window security returns around the date of release of earnings
information can be attributed to earnings itself” (Scott & O’Brien
2020:218)
- That is, despite the attempts at improving the quality of accounting
information, a decreasing proportion of returns is explained by firms’
earnings announcements.

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 Behavioural and Psychological
Perspectives on Investor Rationality

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 The Economic and Behavioural
Perspectives Compared
The economic perspective assumes that the actors making decisions are
rational and able to make computations without any constraint. The economic
perspective highlights how decisions might be made under conditions of full
rationality.

The behavioural perspective focuses the constraints on decision making that

arise from the psychological make up of human actors, that are reflected in
regularly observed forms of behaviour that depart from behaviour that we
consider to be fully rational. Actors satisfice rather than maximize.

Decision makers are boundedly rational in that they are intended rational, but
limited so. Decision makers have limited ability to process information. People
also seek to simplify decision making. Decisions are made using short cuts, or
heuristics, rather than by working out the consequences of the action in full.

People are not necessarily aware of their objectives, which are also subject to
change.
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 Simon (1947) “The Equilibrium of the Corporation”
There are three actors in the firm: the entrepreneur, the customer and the
employee.

Each actor has inducements to participate in the firm and makes contributions
to the firm.

Inducement Contribution
Entrepreneur Revenue Cost of product
Employee Wages Labour
Customer Product Purchase price

Entrepreneur Customer

Worker
See Chapter 6 of Simon, H. (1947) ‘Administrative Behaviour’.

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 Bounded Rationality
Each actor will remain in the firm as long as the satisfaction derived
from the net balance of inducements over contributions exceeds the
satisfaction from withdrawing.

The decisions made by these actors are boundedly rational in that

decision makers are intended rational but only limitedly so.

Actors thus satisfice (rather than maximize) relative to any objectives.

They rely on habitual rules to make judgments about the world.

Actors create organizations because bounded rationality entails that

actors rely on habitual rules in making decisions and organizational
provide a good context for decisions made in this way.

The focus is not on maximizing the value of the firm, but on the
practices that enable firms to attain a robust existence over time.

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 Behavioural studies
Behavioural studies on the psychology of the decision making of
investors argue that average investor behaviour differs from models of
rational decision making (see Scott & O’Brien 2020:192-200).

Individual decision making displays: 1) limited attention: individuals

do not have time to process all available information.
2) Individuals are conservative in their reaction to new evidence
3) Individuals are over-confident in their self-assessments.
4) Representativeness: the individual assigns too much weight to part
of the evidence because it is consistent with the individual’s experience.
5) Self-attribution bias: individuals consider good decision outcomes
as due to their abilities whereas bad outcomes are not their fault.
6) Motivated reasoning: individuals accept at face value information
consistent with their preferences but ignore information that contrasts
with their preferences.
7) Prospect theory (Kahenman & Tversky 1979) and narrow
framing: investors assess potential gains and losses of equal
monetary value differently.
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 James March (1987) ‘Ambiguity and Accounting’
“The flowering of information economics, and agency theory for micro-
economics and information engineering is a gratifying reminder that empirical
research can affect theoretical conceptions” (March 1987: 155)

The critique is not only about uncertainty in the use of information or the
changing preferences of decision makers, but that “…the preferences assumed
in decision theory differ in important ways from the preferences of human
decision makers” (March 1987:156)

“Observations … have led people to describe decision processes in

organizations as completely without order. Others, however, have tried to
specify alternative conceptions of order that might be useful to understand the
[decision making] process [in organizations].” (March 1987:157)

“These ritual, symbolic and affirmative components of decisions and decision

processes are not unfortunate manifestations of an irrational culture. They are
important aspects of the way organizations develop common culture and vision
that become primary mechanisms for effective action, control and innovation.”
(March 1987:161)
See: March, J. (1987) ‘Ambiguity and Accounting: The Elusive Link Between Information and Decision Making’
Accounting, Organizations & Society Vol.12 No. 2:153-168.
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 The Valuation Perspective

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 The Valuation Perspective
• Under the assumption that investors are rational, accounting
statements can rely on historical cost.

• However, if investors are boundedly rational, then accounting

statements should provide additional assistance to investors in
valuing companies.

• Therefore, even in the absence of ideal conditions, accounting

standards might be based on the fair value model.

• “The valuation approach to decision usefulness is an approach

to financial reporting under which accountants undertake a
responsibility to incorporate current values into the financial
statements proper, providing that this can be done with
reasonable reliability, thereby recognizing an increased
obligation to provide investors with up to date information”
(Scott & O’Brien 2020:190)

• The increased disclosure associated with fair value accounting is

argued to be a remedy for securities market inefficiency.
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 Task: Please review the following
essential reading:

Scott, W. R. & O’Brien, P. (2020) Financial

Accounting Theory 8th ed. Chapter 6 ‘The
Valuation Approach to Decision Usefulness’:
p. 190-200,

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 Efficient Contracting and the Critique of
the Fair Value Model

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 Recap: Efficient Contracting Theory
• Efficient contracting theory takes the view that firms organize themselves
to maximize their prospects for survival (Scott & O’Brien 2020:312-313).
• An efficient contract is a contract that accomplishes its objectives at the lowest cost to
the firm and its stakeholders.

• Efficient contracting theory studies the role of financial accounting

information in moderating information asymmetry between contracting
parties, thereby contributing to … efficient corporate governance.

• Firms enter into many contracts such as with customers, suppliers,

management and other employees and lenders. For good corporate
governance, these contracts should be efficient. That is, they must attain
an optimal trade off between the benefits and costs of contracting.

• Contracting is relevant to financial accounting since important contracts

depend on accounting numbers, for example, net income.
• Manager’s performance compensation is based on net income
• Lenders’ loan covenants are based on net income.
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 Lenders and Accounting Policies
for Efficient Contracting
• Reliability: lenders to the firm are focused on policies providing reliable
financial accounting information.
• Lenders are less concerned with good news future information such as unrealized
increases in fair value, as they are with bad news which is associated with decline in
firm value below covenant value.
• Thus efficient contracting theory supports fair value when it can be measured reliably,
(e.g. Level 1 and perhaps also Level 2, but not Level 3).

• Conservatism: lenders would also be interested in knowing about

unrealized losses to a greater extent than they would be interested in
unrealized gains.
• Again, the reason is because they are concerned primarily with the financial distress of
the borrowing firm.

• As discussed last week, reliability and conservatism are associated with

historical cost accounting, rather than fair value accounting.

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 Contracts and Accounting Terminology
• Contracts by their nature are “rigid”; that is, hard to change.
• Over the duration of a long term and rigid contract, accounting
standards will probably change during the life of the contract.
• If the contract refers to accounting terms, accounting standard
changes has implications for the contract.
• There are several alternative solutions to this:
• First, renegotiate the contract on each occasion that the relevant
accounting standards change. But this would be costly.
• Second, include provisions in the initial contract that specify what to do in
the case of accounting change. But accounting changes cannot be
predicted. One cannot specify all the changes in advance. The contract is
“incomplete”.
• Third, retain the accounting standards and terms that were initially used in
the contract. However, this incurs the cost of keeping track of the all the
changes in standards on the contract.
• Fourth, allow the manager some flexibility over accounting standard choice,
so that when standards change, the manager uses discretion to select
between policies so as to retain the original objective of the contract.
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 Task: Please review the following
essential reading:

Scott, W. R. & O’Brien, P. (2020) Financial

Accounting Theory 8th ed. Chapter 8:
‘Efficient Contracting and Accounting’ p.
312-325

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 Tradeoff Relating to the Quality of Standards
• Giving managers the discretion to select from a set of accounting policies
opens up the possibility of opportunistic behaviour. That is, for
managers to select standards that serve their own objectives rather than
those of shareholders.

• There is a trade-off. Specifying accounting policies precisely minimizes

opportunistic actions by management, but incurs the costs associated with
rigid accounting policies.

• Alternatively, allowing the manager flexibility to choose from a broad array

of accounting policies will reduce the cost of contract rigidity (and
inefficiency) but will also expose the firm to costs of opportunistic manager
behaviour.

• Compromise: set accounting standards that give managers limited

discretion to select between a variety of accounting policies. We will
discuss this in the Land Securities case.
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 Economic Consequences
• “When managers change accounting policies and / or change operating
decisions in response to a change in accounting standards change , we
say that the standard change creates economic consequences” (Scott
& O’Brien 2020:324)

• If the manager has no discretion in selecting between accounting policies,

a new accounting standard that impacts reported net income may result in
the manager changing operating policy, and possibly the firm’s strategy.

• If the manager can exercise discretion over accounting choice, then the
manager may change accounting policies so as to increase reported net
income and retain the operating policy that the manager believes is
consistent with the existing strategy of the firm.

• Economic consequences contribute to efficient contracting, for example,

if they are the lowest cost way to avoid default on debt covenants when
the economic state of the firm does not warrant default, or are
opportunistic if they postpone investor awareness of financial distress.
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 Task: Please review the following
essential reading:

Scott, W. R. & O’Brien, P. (2020) Financial

Accounting Theory 8th ed. Chapter 11:
‘Earnings Management’ p. 463-471

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 Did Fair Value Accounting Contribute to
the Financial Crisis?
• Laux & Leux (2010) consider a series of issues in examining this question.

• Did fair value exacerbate the financial crisis by contributing to excessive

leverage in the boom years (leading to the crisis) and excessive write
downs of the value of assets (during and following the crisis)?

• Did the financial accounting standard contribute to further losses and a

self-perpetuating downward spiral of asset values?

• To what extent did the fair value standard require the different types of
banks to account for assets at their current values (mark to market price)
rather than to an estimate of the market price (mark to model).

• To what extent was historical cost accounting permitted? How was

accounting disclosure related to requirements relating to the maintenance
of regulatory capital?
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 Task: You might wish to review the following
further reading:

Laux, C. & Leuz. C. (2010) “Did Fair-Value

Accounting Contribute to the Financial
Crisis?” Journal of Economic Perspectives
Vol. 24, No. 1: 93–118

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 Summary

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 Summary
• In this lecture we introduced two arguments supporting the fair value accounting
model.

• First, we analysed how adverse selection supports the fair value accounting model.

• Second, we introduced the valuation perspective as supporting the fair value model.
– We critiqued the value relevance perspective, supporting the historical cost model, introduced last
week.
– We analysed anomalies relating to securities markets and noted that behavioural approaches to
accounting explain these anomalies. We noted the support of behavioural arguments for the fair value
model.

• Third, we considered efficient contracting as critiquing arguments supporting the fair

accounting model.
– Economic consequences and contract rigidities.
– “Did Fair Value Accounting contribute to the Financial Crisis?” (Laux & Leuz 2010).

• Fourth, we summarised the lecture.

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 Appendix 1:

Introduction to the
Land Securities case

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 Example: Accounting for Investment Property
Consider three companies investing in real estate for the purpose of earning
rental income and making capital gains on their real estate investment: US
Realty, UK Real Estate and International Property.

These companies report on investment properties differently. US Realty

reports in accordance with the historical cost model, International Property
reports in accordance with the fair value model and UK Real Estate reports in
accordance with the revaluation model.

How would the financial reports of the three companies look given the following:
1) Acquisition of property for $1,000 on 31/12/2009
2) The value of the property is $1,300 on 31/12/2010
3) The value of the property is $1,100 on 31/12/2011
4) The value of the property is $500 on 31/12/2012
We assume the land has negligible value and the building depreciates to zero
over ten years.
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 US Realty - Historical Cost Model
Accounting Entries:
Cumulative
Cash Building Depreciation Impairment Dep + Impair
2009 -1,000 1,000
2010 -100 -100
2011 -100 -200
2012 -100 -300
-200 -500

Property Assets and Effect on Net Income:

Building Value Net Income
2009 1,000
2010 900 -100
2011 800 -100
2012 500 -300
Total -500
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 International Property – Fair Value Model
Accounting Entries:
Investment Gain /
Cash Property Loss
2009 -1,000 1,000
2010 300 300
2011 -200 -200
2012 -600 -600

Property Assets and Effect on Net Income:

Investment
Property Net Income
2009 1,000
2010 1,300 300
2011 1,100 -200
2012 500 -600
Total -500
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 UK Real Estate – Revaluation Model
Accounting Entries:
Investment Revaluation
Cash Property Reserve Impairment
2009 -1,000 1,000
2010 300
2011 -200
2012 -100 -500

Property Assets and Effect on Net Income:

Building Value Net Income
2009 1,000
2010 1,300
2011 1,100
2012 500 -500
Total -500
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 Questions for the Land Securities Case
1) How do the different accounting models (historical cost, revaluation and
fair value) affect Land Securities’ balance sheet?

2) Can Land Securities assess the impact of adopting the fair value model
on previous year’s key performance metrics, such as ‘profit on ordinary
activities’?

3) Which model: historical cost, fair value or revaluation reserve, would you
recommend for Land Securities to adopt? Why?

4) The Financial Accounting Standards Board (FASB) in the US and the

International Accounting Standards Board (IASB) are seeking to eliminate
differences between US and international accounting standards. However,
investment properties are reported under the cost model in the US whilst the
IASB allows either the historical cost or fair value model. Should the FASB
also allow the fair value model?

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 Appendix 2: Measures of Income

Reminder:
Defining Income and Revenue,
Income Statement,
Statement of Comprehensive Income,
Statement of Changes in Equity

(Please see Lecture Week 2)

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Defining Income, Revenue, Expense and Profit
Income is defined as “increases in assets or decreases in liabilities, that
result in increases in equity (ownership interest), other than those relating
to contributions from holders of equity claims.”

Contributions from holders of equity claims means new share capital

contributed, such as purchase of the firm’s equity securities by investors.

Revenue is “income arising in the course of an entity’s ordinary activities”

Weetman (2019:47). For example, sales, turnover, fees, commissions,
royalties or rent.

Expense is defined as ““decreases in assets or increases in liabilities, that

result in increases in equity (ownership interest), other than those relating
to distributions to holders of equity claims.” Weetman (2019:46)

Distributions to holders of equity claims means dividends or share capital

returned, through purchase of the firm’s equity securities held by investors.

Profit (Net Income) is revenue minus expense.

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 Income Statement Example
Continuing operations
Revenue
Cost of sales How the firm
= Gross Profit earned its
Distribution costs income.
Administrative expenses
= Profit from Operations
Interest receivable (net) How the income
= Profit Before Tax is shared amongst
Tax those with a claim
= Profit for the period from continuing operations upon the firm.

Discontinued operations
= Loss for the period from discontinued operations
Profit for the period attributable to equity holders
Earnings per share

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 Statement of Comprehensive Income
• The income statement (profit and loss account) reports the
revenues and expenses that arise from a firm’s operations.
• The change in the value of an asset or liability whilst it is held by
the company gives more cause for debate.
• In particular:
– Realized gains and losses are generally included in profit.
– Unrealized gains and losses are generally excluded from profit.
• “The IASB wants to encourage companies to report all changes
in assets and liabilities whatever the cause, in a Statement of
Comprehensive Income” (Weetman 2019:343)
• Consequently, the IASB allows a two-part approach:
– A separate Income Statement
– A second statement beginning with profit and loss from the Income
Statement and incorporating other components of comprehensive income.
• Revaluation of non-current assets: Please see the Land Securities case
• Changes in the exchange rates of foreign currency.
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 Statement of Changes in Equity
• Explains all changes in equity (ownership interest):
• The IASB distinguishes between “owner” changes
in equity and “non-owner” changes in equity.
• “Non-owner changes in equity”
– Profit or loss reported in the income statement and / or
statement of comprehensive income.
• “Owner changes in equity”
– Payment of dividends
– Issuance of equity capital.
• Impact for both non-owner changes in equity and
owner changes in equity of retrospective application
or restatement in disclosure.
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