How to approach it
- Sort every item into: prior-period error (restate), change in estimate (prospective), or current-year equity transaction.
- Work out the error effect on each year's profit and on opening retained earnings of the earliest year shown.
- Build the SOCE with columns for share capital, share premium and retained earnings, rows year by year, with 'as previously reported', 'restatement' and 'restated' lines.
- Dividends: only those declared and approved in the year; use the number of shares in issue when declared.
- Rights issue: shares at par to share capital, excess to premium, issue costs deducted from premium.
Key rules to apply
- IAS 8: correct material prior-period errors retrospectively by restating comparatives and opening equity.
- A change in depreciation method is a change in estimate: apply prospectively from the current year.
- An inventory overstatement at the end of year 1 overstates year 1 profit and understates year 2 profit by the same amount.
- IAS 10: dividends declared after the reporting date are not liabilities at that date.
- Transaction costs of an equity issue are deducted from equity.
Answer layout
| Share capital | Share premium | Retained earnings | |
|---|---|---|---|
| Balance 1 Jan Y1 as reported | |||
| Restatement | |||
| Restated balance | |||
| Profit (restated) | |||
| Dividends | |||
| Balance 31 Dec Y1 | |||
| Bonus / rights / profit / dividends Y2 | |||
| Balance 31 Dec Y2 |
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Presenting opening balances without the restatement line (examiners' point).
- Treating a late start of depreciation as a change in estimate (it is an error) and the method change as an error (it is an estimate).
- Pricing rights shares at market value, or leaving issue costs out of premium.
- Reversing an inventory error in the wrong year.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q9 without copying it.
Original practice question
SOCE with an inventory error and share issues
Noor Ltd: at 1 January 2024 share capital Rs 1,000m (100m shares of Rs 10), share premium Rs 300m, retained earnings Rs 600m. 2024 profit was reported as Rs 150m, but closing inventory at 31 December 2024 was overstated by Rs 10m. A dividend of Re 1 per share for 2023 was declared in April 2024.
In 2025: a 1-for-5 bonus issue from share premium in March; a 1-for-4 rights issue at Rs 12 in October with costs of Rs 3m; draft profit Rs 220m (before fixing the error); an interim dividend of Re 0.50 per share declared in December.
Required: Prepare the SOCE for 2025 with comparatives.
Worked solution
Error: 2024 profit falls by Rs 10m to Rs 140m. 2025 cost of sales used the overstated opening inventory, so 2025 profit rises by Rs 10m to Rs 230m. Shares: 100m + 20m bonus = 120m; rights 30m; 150m at the dividend date.
| Rs m | Share capital | Share premium | Retained earnings |
|---|---|---|---|
| 1 January 2024 | 1,000 | 300 | 600 |
| Profit 2024 (restated) | 140 | ||
| Final dividend 2023 (100m × Re 1) | (100) | ||
| 31 December 2024 (restated) | 1,000 | 300 | 640 |
| Bonus issue 1:5 | 200 | (200) | |
| Rights issue 1:4 at Rs 12 | 300 | 60 | |
| Rights issue costs | (3) | ||
| Profit 2025 | 230 | ||
| Interim dividend (150m × Re 0.50) | (75) | ||
| 31 December 2025 | 1,500 | 157 | 795 |
In the published SOCE, show the 31 December 2024 retained earnings as Rs 650m previously reported, less Rs 10m restatement.
Answer: Closing equity: share capital Rs 1,500m, share premium Rs 157m, retained earnings Rs 795m.