Exploring Capital Structure: Variations in IAS 1 Disclosures of Firm Capital

Abstract

This study examined how a set of Canadian and German firms chose to follow the IAS 1 disclosure guidance on firm capital. Significant variation was found, both within and between Canadian and German firms, in both the propensity to disclose a capital structure and in the form of the disclosure. This variation existed across firms with the same Big4 auditor or where the firms operated in the same industry. Variation was also found regarding which statement of financial position items were included in the firms’ capital structure. While in both countries the capital structure ratios were presented using book values, when these ratios were recalculated using market values, as is common in applied finance, the ratios changed appreciably. Overall, the findings revealed a significant lack of comparability in capital structure disclosures across IFRS-compliant financial statements which should be of concern to international accounting standard setters. The significant variation in capital structure constructions, as well as the use of book values in their measurement, also suggests caution for financial statement users when assessing and comparing firm’s leverage ratios.