A new study out by the UK's Accounting Standards Board (ASB) holds insights on analyzing and explaining internal corporate capital that could prove useful to US and global companies.
The study, which evaluated the quality of capital management disclosures at companies reporting to the ASB, found that although some firms offered thorough analysis of their capital resources, the majority of companies were missing some or most of the information that would "convey meaningfully how they assess capital and how they manage it over the medium to long term."
Having sufficient capital is critical not only to fund growth and act as a buffer against economic shocks, but is also a key consideration in the minds of investors. Those companies that use best practice-or at least make a concerted effort to provide detailed information and analysis-in capital management disclosures will thus have an advantage in attracting investors.
Just providing the bare minimum for compliance or using boilerplate text without any analysis is not enough, according to the ASB.
Information that should be incorporated into such disclosures in order to offer a clear analysis includes the interaction of financial capital resources to the company's growth strategy-both organic and M&A; and equity management strategies around dividends and share buy backs.
Investors may be interested in historical invested capital, accounting capital and/or market capitalization. Plus, they may look at capital solely from an equity capital perspective while others may also look at longer-term debt.
All of these perspectives should be addressed in a well-rounded capital management analysis.
Companies with a capital cushion help to reduce liquidity crisis risk, noted Roger Marshall, chairman of the ASB. He said: "This is particularly important at present given the pressures on particular sectors facing the impact of reduced government spending."
Marshall added: "Capital management is a key discipline that should be on the regular agenda of all boards."