Disclosures about capital
5.4.1
General capital disclosures
The IASB believes that the level of an entity’s capital and how it manages it are
important factors for users to consider in assessing the risk profile of an entity and its
ability to withstand unexpected adverse events. Furthermore, the level of capital might
also affect the entity’s ability to pay dividends. [IAS 1.BC86]. For these reasons, IAS 1
requires disclosure of information that enables users of financial statements to evaluate
an entity’s objectives, policies and processes for managing capital. [IAS 1.134].
To achieve this, IAS 1 requires disclosure of the following, which should be based on
the information provided internally to the entity’s key management personnel: [IAS 1.135]
(a) qualitative information about its objectives, policies and processes for managing
capital, including:
(i) a description of what it manages as capital;
(ii) when an entity is subject to externally imposed capital requirements, the
nature of those requirements and how those requirements are incorporated
into the management of capital; and
(iii) how it is meeting its objectives for managing capital;
(b) summary quantitative data about what it manages as capital;
Some entities regard some financial liabilities (for example, some forms of
subordinated debt) as part of capital. Other entities regard capital as excluding some
components of equity (for example, components arising from cash flow hedges);
(c) any changes in (a) and (b) from the previous period;
(d) whether during the period it complied with any externally imposed capital
requirements to which it is subject; and
(e) when the entity has not complied with such externally imposed capital
requirements, the consequences of such non-compliance.
IAS 1 observes that capital may be managed in a number of ways and be subject to a
number of different capital requirements. For example, a conglomerate may include
entities that undertake insurance activities and banking activities, and those entities may
also operate in several jurisdictions. When an aggregate disclosure of capital
requirements and how capital is managed would not provide useful information or
distorts a financial statement user’s understanding of an entity’s capital resources, the
standard requires disclosure of separate information for each capital requirement to
which the entity is subject. [IAS 1.136].
Examples 3.12 and 3.13 below are based on the illustrative examples of capital
disclosures contained in the implementation guidance accompanying IAS
1.
[IAS 1.IG10-11].
Presentation of financial statements and accounting policies 175
Example 3.12: Illustrative capital disclosures: An entity that is not a regulated
financial institution
The following example illustrates the application of the requirements discussed above for an entity that is not
a financial institution and is not subject to an externally imposed capital requirement. In this example, the
entity monitors capital using a debt-to-adjusted capital ratio. Other entities may use different methods to
monitor capital. The example is also relatively simple. An entity should decide, in the light of its
circumstances, how much detail to provide.
Facts
Group A manufactures and sells cars. It includes a finance subsidiary that provides finance to customers,
primarily in the form of leases. Group A is not subject to any externally imposed capital requirements.
Example disclosure
The Group’s objectives when managing capital are:
• to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns
for shareholders and benefits for other stakeholders; and
• to provide an adequate return to shareholders by pricing products and services commensurately with the
level of risk.
The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and
makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of
dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt.
Consistently with others in the industry, the Group monitors capital on the basis of the debt-to-adjusted capital
ratio. This ratio is calculated as net debt ÷ adjusted capital. Net debt is calculated as total debt (as shown in
the statement of financial position) less cash and cash equivalents. Adjusted capital comprises all components
of equity (i.e. share capital, share premium, non-controlling interests, retained earnings, and revaluation
surplus) other than amounts accumulated in equity relating to cash flow hedges, and includes some forms of
subordinated debt.
During 2019, the Group’s strategy, which was unchanged from 2018, was to maintain the debt-to-adjusted
capital ratio at the lower end of the range 6:1 to 7:1, in order to secure access to finance at a reasonable cost
by maintaining a BB credit rating. The debt-to-adjusted capital ratios at 31 December 2019 and at
31 December 2018 were as follows:
2019
2018
€million €million
Total debt 1,000
1,100
Less: cash and cash equivalents
(90)
(150)
Net debt 910
950
Total equity
110
105
Add: subordinated debt instruments
38
38
Less: amounts accumulated in equity relating to cash flow hedges
(10)
(5)
Adjusted capital
138
138
Debt-to-adjusted capital ratio
6.6
6.9
The decrease in the debt-to-adjusted capital ratio during 2019 resulted primarily from the reduction in net
debt that occurred on the sale of subsidiary Z. As a result of this reduction in net debt, improved profitability
and lower levels of managed receivables, the dividend payment was increased to €2.8 million for 2019 (from
€2.5 million for 2018).
176 Chapter
3
Example 3.13: Illustrative capital disclosures: An entity that has not complied
with externally imposed capital requirements
The following example illustrates the application of the requirement to disclose when an entity has not
complied with externally imposed capital requirements during the period. Other disclosures would be
provided to comply with the other requirements relating to capital.
Facts
Entity A provides financial services to its customers and is subject to capital requirements imposed by
Regulator B. During the year ended 31 December 2019, Entity A did not comply with the capital
requirements imposed by Regulator B. In its financial statements for the year ended 31 December 2019,
Entity A provides the following disclosure relating to its non-compliance.
Example disclosure
Entity A filed its quarterly regulatory capital return for 30 September 2019 on 20 October 2019. At that
date, Entity A’s regulatory capital was below the capital requirement impo
sed by Regulator B by
$1 million. As a result, Entity A was required to submit a plan to the regulator indicating how it would
increase its regulatory capital to the amount required. Entity A submitted a plan that entailed selling part
of its unquoted equities portfolio with a carrying amount of $11.5 million in the fourth quarter of 2019. In
the fourth quarter of 2019, Entity A sold its fixed interest investment portfolio for $12.6 million and met
its regulatory capital requirement.
5.4.2
Puttable financial instruments classified as equity
IAS 32 allows certain liabilities called ‘puttable financial instruments’ to be classified as
equity. Puttable financial instrument is a term defined and discussed at length in IAS 32
(see Chapter 43 at 4.6). The IASB observes that ‘Financial instruments classified as
equity usually do not include any obligation for the entity to deliver a financial asset to
another party. Therefore, the Board concluded that additional disclosures are needed
in these circumstances.’ [IAS 1.BC100B].
The required disclosure for puttable financial instruments classified as equity
instruments is as follows:
(a) summary quantitative data about the amount classified as equity;
(b) its objectives, policies and processes for managing its obligation to repurchase or
redeem the instruments when required to do so by the instrument holders,
including any changes from the previous period;
(c) the expected cash outflow on redemption or repurchase of that class of financial
instruments; and
(d) information about how the expected cash outflow on redemption or repurchase
was determined. [IAS 1.136A].
5.5 Other
disclosures
IAS 1 also requires disclosure:
(a) in the notes of:
(i)
the amount of dividends proposed or declared before the financial statements
were authorised for issue but not recognised as a distribution to owners
during the period, and the related amount per share; and
(ii) the amount of any cumulative preference dividends not recognised; [IAS 1.137]
Presentation of financial statements and accounting policies 177
(b) in accordance with IAS 10 – Events after the Reporting Period – the following
non-adjusting events in respect of loans classified as current liabilities, if they occur
between the end of the reporting period and the date the financial statements are
authorised for issue (see Chapter 34 at 2.1.1):
(i) refinancing on a long-term basis;
(ii) rectification of a breach of a long-term loan arrangement; and
(iii) the granting by the lender of a period of grace to rectify a breach of a long-
term loan arrangement ending at least twelve months after the reporting
period; [IAS 1.76]
(c) the following, if not disclosed elsewhere in information published with the
financial statements:
(i) the domicile and legal form of the entity, its country of incorporation and the
address of its registered office (or principal place of business, if different from
the registered office);
(ii) a description of the nature of the entity’s operations and its principal
activities;
(iii) the name of the parent and the ultimate parent of the group; and
(iv) if it is a limited life entity, information regarding the length of its life. [IAS 1.138].
6 FUTURE
DEVELOPMENTS
The IASB is pursuing a number of matters which relate to the subjects discussed in
this chapter.
The board groups its projects into four categories: standard-setting, maintenance,
research and other. We discuss below the current projects relevant to this chapter under
these headings.3
6.1 Standard-setting
projects
The board has one standard-setting project relevant to the matters discussed in this
chapter. In November 2017, the Board added a project to its agenda to revise and update
IFRS Practice Statement 1 – Management Commentary – issued in 2010 (see 2.3 above).
In undertaking the project, the Board will consider how broader financial reporting
could complement and support IFRS financial statements. To support the Board’s work
on updating the Practice Statement, the Board established the Management
Commentary Consultative Group.
The Board expects to publish an Exposure Draft in the first half of 2020.4
6.2 Maintenance
projects
6.2.1
Distinction between a change in an accounting policy and a change
in an accounting estimate
The IASB is considering amending IAS 8 to clarify the existing distinction between a
change in accounting policy and a change in accounting estimate.
178 Chapter
3
The Exposure Draft Accounting Policies and Accounting Estimates was published
in September 2017. At the time of writing the IASB Website indicates that the next
milestone is to ‘decide project direction’ which is intended to happen in October 2018.
6.2.2
Accounting policy changes (amendments to IAS 8)
The IASB has tentatively decided to amend IAS 8 to lower the ‘impracticability’
threshold regarding retrospective application of voluntary changes in accounting
policies that result from agenda decisions taken by the Interpretations Committee. The
proposed threshold would include a consideration of the benefits and costs of applying
the change retrospectively. The board published an exposure draft in March of 2018
and will consider the feedback to it in the fourth quarter of 2018.5
6.2.3
Proposed clarifications to the classification of liabilities
In February 2015 the IASB published Exposure Draft ED/2015/1 Classification of
Liabilities. The aim of the proposal is to clarify the criteria for the classification of a
liability as current or non-current. To do this, the exposure draft:
• clarifies that the rights which are relevant to the determination are those in
existence at the end of the reporting period; and
• proposes limited word changes to make the terminology used in the guidance
consistent throughout.
The proposals also contain a clarification of the link between the settlement of a liability
and the outflow of resources.
The comment period expired in June 2015. At the time of writing, the website of the
IASB indicates that the Board will decide the direction of the project in September 2018.
6.2.4
Disclosure initiative – accounting policies
In July 2018, the Board added a project to its agenda to develop guidance and examples
to help entities apply materiality judgements to accounting policy disclosure. The Board
added this project in response to feedback on the Disclosure Initiative – Principles of
Disclosure Discussion Paper (see 6.3.1 below).
The Board is developing guidance and examples to explain and demonstrate the
application of the ‘four-step materiality process’ described in Practice Statement 2
(discussed at 4.1.7 above) to accounting policy disclosures. This guidance is initially
being developed for inclusion in the Materiality Practice Statement. The Board will
consider whether to make any related amendments to the standards in a future meetin
g.
The Board will continue its discussions throughout 2018 with a view to publishing an
Exposure Draft of proposed amendments.
6.2.5
Definition of material (amendments to IAS 1 and IAS 8)
The Board proposed clarifying the definition of what information is material in
preparing financial statements so as to align accounting standards with the revised
conceptual framework (discussed in Chapter 2). The Board completed its re-
deliberations in June 2018 and is now drafting the final amendment which it expects to
issue the fourth quarter of 2018.6
Presentation of financial statements and accounting policies 179
6.2.6
Disclosure Initiative – Targeted Standards-level Review of Disclosures
On 21 March 2018, the Board added a project to its agenda to perform a targeted
standards-level review of disclosure requirements. The Board added this project in
response to feedback on the Disclosure Initiative – Principles of Disclosure Discussion
Paper (see 6.3.1 below).
The Board is:
• developing guidance for it to use when developing and drafting disclosure
requirements; and
• testing that guidance by applying it to the disclosure requirements in IAS 19 and
IFRS 13 (discussed respectively in Chapters 31 and 14).
The Board will continue its discussions throughout 2018 with a view to publishing an
exposure draft of amendments to the disclosure requirements of those two standards.
6.3 Research
projects
The IASB is pursuing two research projects relevant to the matters discussed in this
Chapter, these are discussed below.
6.3.1
Principles of disclosure
In March 2016 the IASB published Discussion Paper DP/2017/1 Disclosure Initiative –
Principles of Disclosure.
The main objective of the project is to identify disclosure issues and develop new, or
clarify existing, disclosure principles in IFRS Standards to address those issues and to:
• help entities to apply better judgement and communicate information more effectively;
• improve the effectiveness of disclosures for the primary users of financial
statements; and
• assist the Board to improve disclosure requirements in Standards.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 36
