Definition of equity

Definition of equity: The residual interest in the assets of the entity after deducting all its liabilities.

Equity claim: A claim on the residual interest in the assets of the entity after deducting all its liabilities.

Equity interests: For the purposes of IFRS 3, is used broadly to mean ownership interests of investor-owned entities and owner, member or participant interests of mutual entities. In the context of this Standard “equity interests” may also mean ownership interests established by other mechanisms such as deed or statute.


The Conceptual Framework provides the following guidance [Conceptual Framework 4.64 – 4.67]: Shares issued Earnings per share

Equity claims are claims on the residual interest in the assets of the entity after deducting all its liabilities. In other words, they are claims against the entity that do not meet the definition of a liability. Such claims may be established by contract, legislation or similar means, and include, to the extent that they do not meet the definition of a liability:

  1. shares of various types, issued by the entity; and Definition of equity
  2. some obligations of the entity to issue another equity claim. Definition of equity

Different classes of equity claims, such as ordinary shares and preference shares, may confer on their holders different rights, for example, rights to receive some or all of the following from the entity:

  1. dividends, if the entity decides to pay dividends to eligible holders; Definition of equity
  2. the proceeds from satisfying the equity claims, either in full on liquidation, or in part at other times; or
  3. other equity claims.

Sometimes, legal, regulatory or other requirements affect particular components of equity, such as share capital or retained earnings. For example, some such requirements permit an entity to make distributions to holders of equity claims only if the entity has sufficient reserves that those requirements specify as being distributable.

Business activities are often undertaken by entities such as sole proprietorships, partnerships, trusts or various types of government business undertakings. The legal and regulatory frameworks for such entities are often different from frameworks that apply to corporate entities. For example, there may be few, if any, restrictions on the distribution to holders of equity claims against such entities. Nevertheless, the definition of equity in the Conceptual Framework applies to all reporting entities.

Equity – Different classes – different rights

Different classes of equity claims, such as ordinary shares and preference shares, may confer on their holders different rights, for example, rights to receive some or all of the following from the entity:

  1. dividends, if the entity decides to pay dividends to eligible holders;
  2. the proceeds from satisfying the equity claims, either in full on liquidation, or in part at other times; or
  3. other equity claims.

Equity – Requirements and components of equity

Sometimes, legal, regulatory or other requirements affect particular components of equity, such as share capital or retained earnings. For example, some such requirements permit an entity to make distributions to holders of equity claims only if the entity has sufficient reserves that those requirements specify as being distributable.

Equity – Other types of entities Definition of equity

Business activities are often undertaken by entities such as sole proprietorships, partnerships, trusts or various types of government business undertakings. The legal and regulatory frameworks for such entities are often different from frameworks that apply to corporate entities. For example, there may be few, if any, restrictions on the distribution to holders of equity claims against such entities. Nevertheless, the definition of equity in Equity – Core definition of the Conceptual Framework applies to all reporting entities.

What Is the Difference Between Stock and Equity?
Stock is a traded equity. You will often hear the words “stock” and “equity” used interchangeably, or referred to as “equity shares”.

How Does Equity Financing Work?
Equity financing is a method of raising capital for a business through investor(s). In exchange for money, the business gives up some of its ownership, typically a percentage of shares.

Equity financing can offer both rewards and risks for an investor and a business owner.

The investor is taking a risk, because the company does not pay back his investment. Rather, the investor is now entitled to more of the profits (because he now owns more of the company). This means an investor’s earnings may become significant as time goes on. However, if the company fails, then the investor can lose everything.

The business owner may now have the capital to realize his dreams. However, depending on the percentage of ownership given up, decisions regarding how the business is run may now have to now be shared. Relationships may become strained.

It is not uncommon for a startup to have several rounds of equity financing, in order to expand and meet its goals.

Definition of equity

Definition of equity

Annualreporting.info provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting.info is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org.

Leave a comment