An equity instrument is any financial instrument that evidences the legal right of ownership in a company and where all the payments on the instrument are at the discretion of the issuer, including:
- Share or stock certificates;
- Share options; and
- Other financial instrument convertible into shares.
The shareholders’ equity is the ownership interest in a firm’s net assets that remains after deducting the claims of all creditors, it equaling the value of all the firm’s assets minus all its liabilities:
Shareholders’ Equity = Total Assets − Total Liabilities
Together with assets and liabilities, equity is one of the three elements that represent an entity’s financial position. It is commonly presented on the face of the balance sheet as capital stock, retained earnings and accumulated other comprehensive income.
| Balance Sheet Equity Accounts – US GAAP vs. IFRS | |
| US GAAP | IFRS |
| Capital stock | Issued capital |
| Additional paid-in capital | Share premium |
| Retained earnings | Retained earnings |
| Accumulated OCI | Other reserves |
Shareholders’ equity represents the ownership interest in the company of all holders of all classes of equity. The rights and characteristics of each class of equity are dictated by law or specified in the firm’s articles of incorporation.