Other comprehensive income

Most things that change equity pass through net income and into retained earnings. A specific set does not. Actuarial remeasurements on a defined benefit pension scheme, translation differences on a foreign operation, fair value movements on debt instruments held at fair value through other comprehensive income, and revaluation surpluses under IAS 16 all land directly in a separate equity reserve.

The reasoning is that these movements are largely outside management's control and would make reported profit swing on market noise. Whether that is a good reason is contested, and the practical consequence is that net income no longer captures everything that happened to shareholders' wealth in the period.

IAS 1 requires a statement of changes in equity reconciling every movement in every equity component, which is in effect a fourth primary statement and one candidates almost never mention. It is where you go to explain an equity balance that moved by something other than profit and dividends.

The distinction that matters is recycling. Some items are later reclassified into profit, foreign currency translation on disposal of the operation being the clearest case, while others never are, pension remeasurements being the standard example. An interviewer asking why equity fell in a profitable year is usually looking for this, for dividends, or for a buyback.