I think it should only affect the body, in order not to open a can of worms about all the cases to manage otherwise. I mean, how far goes "worn equipment"? Does it mean someone may go through security whilst wearing full plate armour, a shield, a polearm and a fully loaded basket on his shoulders by merely casting a level five spell (Change to kind) to take the form of a person only wearing clothes? Or that burglars may load themselves with stolen goods, turn into a dog and voilà! they're now unencumbered? I'm also against items held being transformed, or we'd get cases where people armed with a fork would suddenly be wearing an halberd because they "changed" into an halberd-helding guard! Adding the three (worn, carried and held) would allow a person wearing a shirt and a fork to suddenly be wearing a full plate armour, a shield and an arming sword, carrying bags full of useful (even if, at least, not magical) items… Also, if one "changes" into a banker (or the guy who just left carrying a bag full of gold, who is the guy one wants to impersonate, if you prefer), would one's bag full of cheese turn into a bag full of gold?
Etc.
IMO, allowing the change of the items worn, held or carried has too much potential for abuse. Since avoiding all of them is easy by ruling only the body changes, I'd go with it.