Adequate capital is essential to well-run businesses, particularly those seeking to fund future growth or manage a crisis. Investors have told the Accounting Standards Board (ASB) that they are interested in how much financial capital a business needs and whether there is a surplus or a deficit.
The ASB study of the quality of capital management disclosures concludes that there is good practice in places. But too often there is excessive boilerplate text and too many companies have missed essential elements of the required disclosures.
Roger Marshall, chairman of the ASB, said: “Capital management is a key discipline that should be on the regular agenda of all boards. Adequate capital supports growth and provides a buffer against significant economic shocks so reducing the risk of a liquidity crisis. This is particularly important at present given the pressures on particular sectors facing the impact of reduced government spending.”
Informative disclosures made by some companies highlight good practice. For example, some linked capital to business strategy and to dividend policy. Markets are keen to avoid surprises so these disclosures need to explain the potential for future events such as a rights issue or a share buy back programme.
The ASB will continue to monitor the quality of capital disclosures in view of the importance of adequate capital during this phase of the business cycle.
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