Capital structure refers to the amount of debt and/or equity employed by an entity to fund its operations and growth, and finance its assets. The structure is typically expressed as a debt-to-equity or debt-to-capital ratio. Managing capital structure is a balancing act. Cost of debt is lower than that of equity because scheduled interest payments are contractual, and debtholders receive priority in the event of liquidation. Entities also enjoy tax relief on interest expense. However, excessive debt levels lead to high interest expenses and increase the volatility of earnings and the risk of bankruptcy. As such, entities need to balance the usage of debt in their capital structure. Unfortunately, there is no magic debt-to-equity ratio to use as guidance to achieve real-world optimal capital structure. Factors determining the optimal mix include the industry, line of business, and a firm’s stage of development. The optimal mix can also vary over time due to external changes in interest rates and regulatory environment.

A McKinsey (2006) article states that “the potential harm to a company’s operations and business strategy from a bad capital structure is greater than the potential benefits from tax and financial leverage”. It further adds that “in our view, the trade-off a company makes between financial flexibility and fiscal discipline is the most important consideration in determining its capital structure and far outweighs any tax benefits”. Recent news on companies in financial trouble because of their high leverage position and their inability to meet the debt commitments highlights the significant damage that can arise from a bad capital structure. Furthermore, as capital structure becomes more complex and financial instruments become more elaborate, understanding what the entity manages as capital and the entity’s policies and processes for managing capital may be indispensable for users to assess the risk profile of an entity.

Consistent with this, the basis for conclusions on IAS 1 Presentation of Financial Statements para BC86 states that disclosures on an entity’s capital structure and its management strategy are important to help users assess the risk profile of an entity and the entity’s ability to withstand unexpected adverse events. As such, the Singapore equivalent of IAS 1, SFRS(I) 1-1 Presentation of Financial Statements, para 134 requires entities “to disclose information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital”. Para 135 provides the compliance guidelines, which include both qualitative information and summary quantitative data about what the entity manages as capital and how it is meeting its objectives for managing capital.

The Monetary Authority of Singapore published its inaugural Enforcement Report in March 2019, and lists “timely and adequate disclosure of corporate information for better investor protection” as one of its enforcement priorities for 2019/2020. This comes amid an observed trend of poor disclosure of material information by listed entities. In this article, I examine the disclosure practices on capital management for a sample of entities1 listed on the Singapore Exchange (SGX) with high debt-equity (DE) ratio. I examine this set of entities as capital disclosures of the higher leveraged entities should be of greater interest to the investors and creditors. For comparison purposes, I also examine the disclosure practices of the top 20 largest firms listed on SGX.


I obtained a list of entities with DE ratio above 100% (extracted from SGX website as at 9 April 2019), and formed three subsamples according to market value (MV) as follows:

  • High DE-Large: MV > S$200 million
  • High DE-Mid: S$50 million < MV < S$200 million
  • High DE-Small: MV < $50 million

For each subsample, I ranked the entities by MV and selected the top 20 entities in each subsample. I also selected the top 20 entities (Top 20) by market capitalisation listed on the SGX as at 29 March 2019.2 The final sample consisted of 80 entities. For each entity in the sample, I examined one year of annual report with financial year ending between 31 December 2017 and 30 September 2018, both dates inclusive. I searched for capital management disclosure in the Notes to the Accounts. Using the compliance guideline per SFRS(I) 1-1 para 135, I examined each entity’s disclosure of its objectives, policies and processes for managing capital.


(1) Objectives

All entities disclosed their objectives in managing capital. Many entities stated that they are committed to an “efficient” and “optimal” capital structure with no description of what that means. Objectives common to many include “ability to continue as a going concern”, to “maximise shareholder value”, and to “provide benefits to stakeholders”. The next common listed objective is to manage capital to support “growth/future development”. A few large entities list “financial flexibility” and “adequate access to liquidity to mitigate the effect of unforeseen events” as objectives. Table 1 summarises the number of entities with the respective objectives.

Table 1 Objectives

(2) Policies and Processes

While SFRS(I) 1-1 does not state the kind of disclosures required here, the illustrative examples on capital disclosures in the Implementation Guidance provide an idea of the information on policies and processes that may be useful for investors. I examined the disclosures on the following four items:

  • Who is responsible for capital management;
  • How frequently does the entity review its capital structure;
  • What ratios does the entity monitor;
  • Is there a target/cap on the DE ratio.

Table 2 summarises the findings. Only a handful state that the Board of Directors (BOD), or a committee of the BOD, is responsible for capital management. Most entities use “Management” or “Group” when describing capital management activities without being specific about who or what committee manages the capital structure.

Very few entities provide a specific time period for the frequency of review of its capital structure. Those who did, specified “annual” or “semi-annual” as the frequency of review. All firms in the Top 20 subsample disclose what are being monitored in the review, whereas nearly 50% of the entities in the High DE-Small subsample do not disclose what are being monitored. A handful of entities voluntarily disclose capital targets set by management.

Table 2 Policies and Processes

(3) Summary Quantitative Disclosures

The compliance guideline in SFRS(I) 1-1 para 135 includes disclosure of summary quantitative data about what entities manage as capital. Most entities provide computations of what is regarded as debt, equity and/or capital and the corresponding gearing ratio.4 A handful provides the gearing ratio without showing any computations while 40% of the entities in the High DE-Small subsample do not provide any quantitative disclosures. Table 3 summarises the findings.

Table 3 Summary Quantitative Disclosures


The technical definition of an optimal capital structure is the best mix of debt, preferred stock, and common stock that maximises an entity’s market value while minimising its cost of capital. What it means practically and how entities determine the debt-equity mix to fund operations and grow the businesses is, however, not clear. With the rising level of corporate debt, it becomes even more critical for investors and creditors to understand how entities manage their capital structure.

The findings in this article show that there are significant opportunities for improvement in capital management disclosures. Entities can consider including more informative qualitative disclosures on the policies and processes for managing capital. Such disclosures include who is responsible for capital management, frequency of review, what ratios are being monitored and if there is a target DE ratio or target cost of capital. Entities can also improve on their quantitative disclosures on what is managed as capital. Such disclosures would help investors and creditors assess the risk profile of an entity and convey confidence that the entity is actively managing its capital structure in its pursuit of growth opportunities and ensuring that it has the financial strength and flexibility to withstand unexpected adverse events. Missing (or poor) disclosures could be due to oversight but may also convey the impression that the entity does not actively manage its capital. Investors would be concerned that such entities may pursue growth opportunities at the cost of an efficient capital structure which, in the long term, can be detrimental for all stakeholders.

Patricia Tan is Associate Professor of Accounting, Nanyang Business School, Nanyang Technological University.

1 I exclude financial institutions and Reits/Trusts as they are subjected to externally imposed capital requirements.

2 The original Top 20 entities included three entities that were in the High DE-Large subsample. These three entities in the original Top 20 entities were replaced so that there was no overlap between the final Top 20 entities and the High DE-Large subsample.

3 Such items include return on capital employed, cost of capital and interest coverage.

4 Common gearing ratios are debt-to-equity and debt-to-capital.