Which Equity Statement Should You Use in Your Client’s Financials? Section 6 of the IFRS for SME

1 Apr

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If you’re running a practice, chances are you’ve asked this more than once: “Do I really need to do a full Statement of Changes in Equity for this client, or can I keep it simple?”

Section 6 of the IFRS for SMEs gives you a choice between two formats for reporting changes in equity. One is detailed. The other is streamlined. Knowing the difference doesn’t just keep your client compliant—it saves you time, helps you deliver value, and positions you as the advisor who knows how to get things done right.

Let’s break it down in practical terms, so you can use it with confidence in your client work.

Two Statements. One Goal: Clear, Accurate Equity Reporting

Section 6 focuses on helping users of financial statements understand how a business’s equity changed over the financial year. That means profits, losses, dividends, share transactions, and any other movements that affected the company’s net worth.

There are two ways to report this:

Statement of Changes in Equity – the comprehensive version
Statement of Income and Retained Earnings – the simplified version (allowed only in certain situations)

The choice depends on the nature of your client’s business and what happened in their equity during the year. Choose wrong, and you risk non-compliance. Choose right, and you save yourself time and your client money.

When to Use the Full Statement of Changes in Equity

This is the standard format—especially where equity is a bit more complicated. You’ll need to use it if the business has any of the following:

Other comprehensive income (for example, foreign currency differences or revaluations)
Adjustments from changes in accounting policies or correction of errors
Transactions with owners, such as issuing shares, buying back shares, or changes in subsidiary ownership that don’t lead to loss of control

The statement must show:

Total profit or loss for the period
Any other comprehensive income
Changes in equity for each component—retained earnings, share capital, reserves—explaining clearly how the opening balance became the closing balance

In short: this format gives a full reconciliation of movements in equity. It’s ideal (and often necessary) for clients with investors, multiple owners, foreign operations, or more complex business structures. It also ticks the boxes when lenders or stakeholders demand transparency.

When the Simpler Statement of Income and Retained Earnings Is Enough

For smaller, owner-managed entities, especially those with straightforward operations and no external investors, the IFRS for SMEs allows a shortcut: combining income and changes in retained earnings in a single statement.

But there’s a catch. You can only use this if the only changes in equity during the period are:

Profit or loss
Dividends declared and paid
Corrections of prior period errors
Changes in accounting policy

This version cuts out the need to disclose other components of equity—perfect for clients with a clean, simple financial story.

What you still need to include:

Retained earnings at the beginning of the year
Profit or loss for the year
Any dividends paid
Any restatements from policy changes or errors
Retained earnings at year-end

Using this approach appropriately helps you speed up the financial close process, keep compliance costs down for your clients, and focus your time on higher-value advisory work.

Don’t Skip the Notes—They Still Matter

Even if you’re using the simplified statement, Section 6 still requires some key disclosures in the notes:

The amount of any dividends declared before the financial statements were authorised for issue but not yet recognised as distributions
Any cumulative preference dividends that haven’t been recognised

These disclosures help prevent confusion and misinterpretation—especially when clients are dealing with funders, potential investors, or SARS reviews.

Why This Matters to You and Your Clients

Let’s face it, most clients don’t know (or care) what Section 6 is. But they do care about:

Staying compliant and avoiding SARS issues
Getting funding approved without back-and-forths over their financials
Keeping accounting fees under control while still getting quality service

And you? You want to protect your time, deliver consistent quality, and prove you’re worth every cent they pay you.

Mastering when and how to use these two equity reporting formats helps you:

Make better calls during the year-end process
Advise clients more effectively on business structuring and shareholder changes
Avoid unnecessary complications or rework during reviews or audits

It’s one more way to show your clients you’re not just “doing the books”—you’re managing their business risk and helping them look sharp on paper.

Your Move

Next time you’re preparing financials, take a minute to ask: Does this client really need a full Statement of Changes in Equity, or can I simplify with a Statement of Income and Retained Earnings? It’s a small decision, but it speaks volumes about your attention to detail and your ability to deliver value without overengineering.

Access the IFRS for SME Annual Financial Statements CPD here.

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