In the Equity section of the Balance sheet or Statement of Financial Position, Share capital, Retained Earnings and Reserves are generally shown. There are some other Components of Equity also that are shown in the presentation of financial statements. These may be as follows:
Asset Revaluation Surplus: Lies In Other Components Of Equity
IAS 16 Property, Plant and Equipment allow entities an alternative in the measurement of these assets. Particularly, entities may choose between measuring the assets at cost which is called the Cost Model or at fair value which is called the Revaluation Model. If the fair value basis (Revaluation Model ) is chosen, revaluation increases are recognized in other comprehensive income and accumulated in equity via an asset revaluation surplus or asset revaluation reserve in other components of equity.
The requirement to use the asset revaluation surplus is effectively a measure adopted by the IASB to stop the increase in the fair value of the assets being recognized immediately in profit or loss for the period. It may be argued that this is an application of the Prudence Concept in that the fair values of the assets may decline in a later period and to allow the recognition in current period profits of movements in the fair values of assets would introduce volatility into the profit figures.
However, certain movements in the asset revaluation surplus are required by IAS 1 to be disclosed as an item of other comprehensive income in the statement of profit or loss and other comprehensive income.
On the creation of an asset revaluation surplus, an entity is not restricted in its subsequent disposition. It may be used for payment of dividends or be transferred to other reserves including retained earnings. Amounts recognized directly in the asset revaluation surplus cannot subsequently be recognized in profit or loss for the period even when the revalued asset is disposed of.
Foreign Currency Translation Differences: Lies In Other Components Of Equity
Foreign currency translation differences arise when foreign operations are translated from one currency into another for presentation purposes in the financial statements. The changes in wealth as a result of the foreign currency translation process are thereby not taken through profit or loss for the period and are recognized in profit or loss only if and when the investor disposes of its interest in the foreign operation.
Fair Value Differences: Lies In Other Components Of Equity
Gains and losses on available-for-sale financial assets are recognized directly in equity until the financial asset is derecognized. At this time, the cumulative gain or loss previously recognized in equity is recognized in profit or loss. This is a situation where the IASB allows the recycling of reserves to income, an accounting treatment unavailable with other reserves.
Under IFRS 9 Financial Instruments, at initial recognition, financial assets and liabilities are measured at fair value. Paragraph 5.7.5 of IFRS 9 permits an entity to make an irrevocable election to present in other comprehensive income changes in the fair value of an investment in an equity instrument that is not held for trading. It will not, however, allow recycling of reserves to income.
