The concept of “transactions with owners in their capacity as owners” appears in both IFRS 18 and IAS 1. It is the key to determining whether a transaction or other event is recognised directly in equity rather than through P/L or OCI.
IFRS 18.112 (or IAS 1.109) states that the overall change in equity during a period represents the total amount of income and expenses generated by the entity’s activities during that period. The only exceptions are changes resulting from transactions with “owners in their capacity as owners” and transaction costs directly related to those transactions. This approach is supported by Appendix A to IFRS 18, which defines total comprehensive income as the change in equity during a reporting period resulting from transactions and other events, other than changes resulting from transactions with owners in their capacity as owners.
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Transactions in an owner capacity
Not all transactions with counterparties that hold equity claims qualify as transactions with owners in their capacity as owners. Although IFRS 18 doesn’t elaborate on this point, the context indicates that the reason for, and substance of, the transaction will be decisive.
The clearest evidence of a transaction in an owner capacity is that it explicitly changes equity claims. Examples include issuing shares, buying back shares, declaring dividends or changing the respective ownership interests of the parent and NCI without a loss of control.
More subtle evidence may arise when a transaction is non-reciprocal or intentionally off-market, and the missing value can be economically explained only by the ownership relationship. A typical example is a parent providing below-market funding to a subsidiary or buying goods or services from, or selling them to, a subsidiary on off-market terms. In these cases, the commercial element may, and in some circumstances should, be separated from the owner element.
Retrospective adjustments and restatements
There are also two common scenarios that lead to the recognition in equity of non-owner transactions or events, or at least that’s the usual way of thinking about them. These scenarios are:
- retrospective adjustments for changes in accounting policies; and
- restatements to correct errors.
So, how should we reconcile this accounting treatment with the general rule in IFRS 18.112 (or IAS 1.109)? Retrospective adjustments and restatements adjust the opening balance of equity rather than represent a change in equity occurring during the reporting period. A retrospective adjustment therefore doesn’t affect the overall change in equity during the period and, accordingly, doesn’t conflict with the requirement to recognise the effects of non-owner transactions in P/L or OCI (IFRS 18.108).