From Financial to “Sustainable” Capital Maintenance

Abstract

How should corporate sustainability be addressed in financial reporting? This research investigates the potential use of capital maintenance as a framework to develop sustainability reporting. Its claim is that the disclosure of capital should be reconsidered to strengthen corporate accountability.After conducting a historical review of capital maintenance theories, three purpose-oriented treatments are identified: the net assets, dynamic and sustainable views. From the viewpoint of stakeholders' information and corporate social responsibility, disclosure based on the sustainable capital maintenance view would enhance transparency. Furthermore, it would provide a measurement basis that currently lacks for subsequent regulation of corporate behavior.Consistently, relevant accounting methods should be developed to complement the loopholes of modern reporting standards. The claim of this research is that sustainable capital maintenance could be implemented by defining and disclosing three key elements of equity: capital contributed by shareholders, retained earnings, and a sustainability reserve, which would reflect the financial assessment of future environmental and social risks. Since this reserve would only affect the allocation of retained earnings and not the measurement of performance, it would be compatible with international financial reporting standards.

Share Capital Maintenance in Large Croatian Groups

“…Both debt and equity have to be closely examined because the specific mixture of the two is the firm's capital structure." 11 A company's capital structure (or financial structure) "refers to the specific mixture of long-term debt and equity the firm uses to finance its operations" 12 . The process of planning and managing a company's long-term investments is known as capital budgeting 13 .…”