Please enable JavaScript.
Coggle requires JavaScript to display documents.
Giving investors what they need - Coggle Diagram
Giving investors what they need
Introduction
Often the advice to investors is to focus upon
cash and cash flow
when analysing corporate reports
insufficient financial capital
cause liquidity problems
sufficiency of financial capital
is essential for growth
Discussion of the management of financial capital
normally linked with entities that are subject to
external capital requirements
but it is equally important to those entities which do not have regulatory obligations
What is it?
Financial capital
defined in various ways
has no accepted definition having been interpreted as
equity held by shareholders or
equity plus debt capital including finance leases
has impact on ROCE
important to all companies and not just banks and insurance companies
understanding of
what an entity views as capital and
its strategy for capital management
diverse views of users in their analysis of capital
historical invested capital
accounting capital
market capitalisation.
diversity in practice as to what different companies see as capital and how it is managed
Investor needs
specific but different needs depending upon their approach to the valuation of a business
valuation approach
dividend model
shortage of capital may have an impact upon future dividends
ROCE is used for comparing the performance of entities
investors need to know the nature and quantity of the historical capital employed in the business
disclosure about capital
IFRS 7 Financial Instruments is considering whether companies should disclose information about capital
In assessing the risk profile of an entity, it is important to consider
management and level of an entity’s capital
Board believes that disclosures about capital are useful for all entities
but they are not intended to replace disclosures required by regulators as their reasons for disclosure may differ from those of the Board
As an entity’s capital does not relate solely to financial instruments
the Board has included these disclosures in IAS® 1, Presentation of Financial Statements rather than IFRS 7
IFRS 7 requires some specific disclosures about financial liabilities, it does not have similar requirements for equity instruments
The Board considered whether the definition of ‘capital’ is different from the definition of equity in IAS 32, Financial Instruments; Presentation
In most cases disclosure capital would be the same as equity but it might also include or exclude some elements
disclosure of capital is intended to give entities the ability to describe their view of the elements of capital if this is different from equity
IAS 1 Disclosures
As a result, IAS 1 requires an entity to disclose information that enables users to evaluate
entity’s objectives
policies
processes for managing capital
This objective is obtained by disclosing
qualitative data
include narrative information such as
what the company manages as capital
whether there are any external capital requirements
how those requirements are incorporated into the management of capital
quantitative data
exclude disclosure of externally imposed capital requirements
include disclosure of whether the entity has complied with any external capital requirements
and, if not, the consequences of non-compliance
no requirement to disclose the capital targets set by management and whether the entity has complied with those targets, or the consequences of any non-compliance
Some entities regard some financial liabilities as part of capital whilst other entities regard capital as excluding some components of equity for example those arising from cash flow hedges
Examples of some of the disclosures include info which are provided internally to KMP, on
how gearing is managed
how capital is managed to sustain future product development
how ratios are used to evaluate the appropriateness of its capital structure
If the entity operates in several jurisdictions with different external capital requirements such that an aggregate disclosure of capital would not provide useful information
the entity may disclose separate information for each separate capital requirement
management should include forward-looking information in the commentary when it is aware of trends, uncertainties or other factors that could affect the entity’s capital resources
this is suggested by
IAS 1
IFRS Practice Statement Management Commentary
Companies Act
some jurisdictions refer to capital disclosures as part of their legal requirements
In the UK, Section 414 of the Companies Act 2006
contents of the Strategic Report
requires a ‘balanced and comprehensive analysis’ of
the development and performance of the business during the period, AND
the position of the company at the end of the period.
understanding of the development, performance or position of the business, the strategic report should include an analysis using key performance indicators
It makes sense that any analysis of a company’s financial position should include consideration of how much capital it has and its sufficiency for the company’s needs
The Financial Reporting Council Guidance on the Strategic Report
suggests that comments should appear in the report on the entity’s financing arrangements
such as changes in net debt or the financing of long-term liabilities
Capitalisation table
investor may find details of the entity’s capital structure where the entity is involved in a transaction
such as a sale of bonds or equities
In addition to the annual report
normal for entities to produce it in prospectus showing the effects of the transactions on the capital structure
The table shows the ownership and debt interests in the entity but may show potential funding sources, and the effect of any public offerings
may present the pro forma impact of events that will occur as a result of an offering
such as
automatic conversion of preferred stock
the issuance of common stock
the use of the offering proceeds for the repayment of debt or other purposes
The Board does not require such a table to be disclosed but it is often required by securities regulators
practice in the US
the table is used to calculate key operational metrics
Amedica Corporation announced in February 2016 that it had ‘made significant advancements in its ongoing initiative toward improving its capitalisation table, capitalisation, and operational structure’
information regarding an entity’s capital structure is spread across several documents including
management commentary
the notes to financial statements, interim accounts
any document required by securities regulators.
Debt and equity
two classes of capital
namely debt and equity
However, debt and equity instruments can have different levels of benefits and risks
IAS 32
does not look to the legal form of an instrument but focuses on the contractual obligations of the instrument
sets out the nature of the classification process
but the standard is principle based
sometimes the outcomes are surprising to users
considers the substance of the financial instrument
applying the definitions to the instrument’s contractual rights and obligations
The variety of instruments issued by entities makes this classification difficult with the application of the principles occasionally resulting in instruments that seem like equity being accounted for as liabilities
Recent developments in the types of financial instruments issued have added more complexity to capital structures with the resultant difficulties in interpretation and understanding
The Board
has undertaken a research project with the aim of improving accounting for financial instruments that have characteristics of both liabilities and equity
has a major challenge in determining the best way to report the effects of recent innovations in capital structure
Diversity and difficulty
diversity of thinking about capital
which is not surprising given
the issues with defining equity
the difficulty in locating sources of information about capital
the diversity of business models in an economy
Capital needs are very specific to the business and are influenced by many factors such as
debt covenants
preservation of debt ratings
The variety and inconsistency of capital disclosures
does not help the decision making process of investors
Therefore the details underlying a company’s capital structure are essential to the assessment of any potential change in an entity’s financial flexibility and value