The residual interest in the assets of the entity after deducting all its liabilities.
The Conceptual Framework provides the following guidance [Conceptual Framework 4.64 – 4.67]:
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:
- shares of various types, issued by the entity; and
- some obligations of the entity to issue another equity claim.
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:
- dividends, if the entity decides to pay dividends to eligible holders;
- the proceeds from satisfying the equity claims, either in full on liquidation, or in part at other times; or
- 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.4.67 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.« Go to IFRS Jargon