Question

how reporting capital structure is challenging, but markets are keen for the information. (investors point of view)

And Explain Investor Needs

Answer 1

The term Financial Capital has no single accepted definition. It can be interpreted as the equity held by shareholders or equity plus debt capital including finance leases. This definition can obviously affect the way within which capital is measured, and which successively has an effect on the return on capital employed (ROCE) figure.

Users of financial reports have diverse views about what's important in their analysis of capital. Some target on the entity’s historical invested capital, some concern themselves with its accounting capital, et al. look to its market capitalisation.

It is required by comapnies to disclose about its capital structure in its financial reports mandatorily.

International Accounting Standards Board (IASB) considered the actual fact that whether a corporation requires disclosures about capital or not. In any assessment of the risk profile of an entity, the management and level of the entity’s capital is a very important consideration.

The IASB believes that disclosures about capital are useful for all entities. In most cases disclosure of capital would be the identical one as for equity but it'd include or exclude some elements. The disclosure of capital is intended to supply entities the ability to explain their view of the elements of capital that whether this is different from equity. IAS 1 requires an entity to disclose its information that helps users to gauge its objectives, policies and processes for managing capital. This objective is earned by disclosing qualitative and quantitative data.

Some of the disclosures made by entities include information on how the financial gearing is managed, how capital is managed to sustain product development, and the way the ratios are accustomed to evaluate the appropriateness of the capital structure.Analysis of a company’s financial position should include a consideration of what proportion of capital it has and its sufficiency for the company’s needs.

The annual report is not the sole document that an investor may consult to look out for details of an entity’s capital structure. Where the entity is involved in a financial transaction, such as a sale of bonds or equities, it basically produces a capitalisation table in a prospectus which shows the consequences of the proposed transactions on its capital structure. The capitalisation table lays out the ownership and debt interests in the entity, but might also show its potential funding sources, and therefore, the effect that any public offerings will have.

INVESTOR'S NEEDS:

Investors have specific but various different needs for information about the entity’s capital reckoning on the approach they go for to the valuation of the business. For example, if their valuation approach is based on a dividend model, then a shortage of capital may have an effect on future dividends. If, however, Return on Capital Employed is adopted for comparing the performance of entities, then investors must know the nature and the quantity of the historical capital employed within the business. There is diversity in practice on what different companies see as capital and the way it's managed.