Disclosure capital management

Disclosure capital management

Get the requirements for properly disclosing capital management procedures applied by your company to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used  standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.

Disclosure capital management guidance

Capital risk management

1. Capital is not defined in any of the IFRSs. Entities must describe what they manage as capital, based on the type of information that is provided internally to the key management personnel. It therefore depends on the individual entity as to whether capital includes interest-bearing debt or not.

If such debt is included, however, and the loan agreements include capital requirements such as financial covenants that must be satisfied, then these need to be disclosed under paragraph 135(d) of IAS 1 Presentation of Financial Statements. [IAS 1.134, IAS 1.135]

Dividends

Parent vs consolidated information

2. The dividends disclosed in this note are only those paid by the parent entity and do not include dividends paid by subsidiaries to non-controlling interests. IAS 1 requires disclosure of the dividends recognised as distribution to owners during the period (paragraph 107). The term ‘owners’ is generally used in IAS 1 in the context of owners of the parent entity (eg paragraphs 81B and IAS 1.106).

The focus of the financial statements is still on the parent entity shareholders and on that basis a disclosure of dividends per share is only relevant for the owners of the parent entity. This disclosure also correlates to the disclosure of the number of shares issued as required under paragraph 79 of IAS 1. Holders of non-controlling interests will receive their dividend information from the separate financial statements of the relevant subsidiaries.

Other potential disclosures

3. The following requirements are not illustrated here as they are not applicable to RePorting Co. Plc:

4. The following illustrative disclosure may be useful where relevant to an entity:

Non-cash dividends

Where an entity distributes non-cash assets to its owners, an explanation could read as follows:

In November 2020, XYZ Plc transferred all of the shares held in its subsidiary, ABC Limited, to its parent entity as a non-cash dividend. The dividend was measured at the fair value of the subsidiary (CU2,500,000). The difference between the fair value of the shares and their carrying amount (CU1,800,000) is presented in the statement of profit or loss as other income (CU700,000). [IFRIC 17.11, 14, 15, 16]

Example disclosure capital management

13(a) Risk management Guidance 1

The group’s objectives when managing capital are to: [IAS 1.134, IAS 1.135, IAS 1.136]

• safeguard the ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and
• maintain an optimal capital structure to reduce the cost of capital.

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.

Consistent with others in the industry, the group monitors capital on the basis of the following gearing ratio:

During 2020, the group’s strategy, which was unchanged from 2019, was to maintain a gearing ratio within 25% to 50% and a B credit rating. The credit rating was unchanged and the gearing ratios at 31 December 2020 and 31 December 2019 were as follows: [IAS 1.134, 135, 136]

The net debt to equity ratio decreased from 47% to 27% as a result of the rights issue (see note 9(a)) and tighter monitoring of trade debtor payments, which has resulted in an increase of operating cash flows and cash held by the group at the end of the year. [IAS 1.135(c)]

(i) Loan covenants Guidance 1

Under the terms of the major borrowing facilities, the group is required to comply with the following financial covenants: [IAS 1.135(d)]

• the gearing ratio must be not more than 50%, and
• the ratio of net finance cost to EBITDA must be not more than 10%.

The group has complied with these covenants throughout the reporting period. As at 31 December 2020, the ratio of net finance cost to EBITDA was 8% (10% as at 31 December 2019).

13(b) Dividends Guidance 2 – 4

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