Identify the capital management measure first
For FY 2025–26, Ind AS 1 paragraphs 134–136 require information that lets readers evaluate how the entity manages capital. Define capital using the information reported internally to key management personnel. Explain material inclusions or exclusions and give summary amounts. Equity in the balance sheet is a useful starting point for a bridge, but the measure used by management can include some subordinated liabilities or exclude some components of equity.
Read the applicable text: ICAI 2025–26 compendium: Ind AS 1, paragraphs 134–136 ICAI compendium and applicable edition.
Distinguish three measures readers may see
The capital management note may sit beside book equity and an externally defined capital ratio. Keep them separate. Map each measure to its evidence and disclose what management monitors, how it meets objectives and what changed from the prior period. A bridge from ledger balances to the measures used in the management pack is a practical control; it does not redefine equity or require every entity to adopt a standard gearing ratio.
Record externally imposed requirements and actual compliance
For each applicable requirement, identify its source, scope, measurement dates, numerator, denominator and threshold. Explain its nature, how management incorporates it into capital management, whether the entity complied during the period and the consequences of noncompliance where applicable. A satisfactory closing calculation does not by itself establish compliance on earlier required test dates. Treat an internal target as an internal target; a miss alone does not establish an external breach.
Avoid masking separate requirements
Paragraph 136 calls for separate information by requirement if an aggregate disclosure would be unhelpful or distort understanding. A parent surplus may be unavailable to a regulated subsidiary. Build a separate working for each material requirement with the correct reporting perimeter, currency, basis and restrictions. Use a group total only where the underlying numbers and presentation make it meaningful.
Distinguish the capital note from related disclosures
A breach note explains the capital consequence based on the actual terms and events. Assess liability classification, covenant disclosures and going concern separately under the applicable requirements; do not use a capital ratio alone to decide any of them. If a waiver, cure or remediation is relevant, show when it occurred and its effect rather than implying it erased an earlier breach.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Bridge the management measure
Book equity is ₹150 crore, including a ₹6 crore hedge reserve management excludes. Management adds ₹20 crore of qualifying subordinated funding to its capital measure. The management total is ₹164 crore. The balance sheet classifications stay as reported.
Illustrative example 2: Separate an internal gearing ceiling
Management sets a maximum gearing ratio of 60% and measures gearing as net debt divided by managed capital. Net debt of ₹54 crore divided by managed capital of ₹100 crore gives actual gearing of 54%, six percentage points below the internal ceiling.
Illustrative example 3: Measure the external shortfall
A fictional external requirement is 12% of ₹500 crore of exposure. Required capital is ₹60 crore. Qualifying capital of ₹57 crore gives 11.4%, a ₹3 crore or 0.6 percentage point shortfall.
Illustrative example 4: Keep test dates visible
An entity must hold ₹80 crore at each quarter end. It reports ₹78 crore at September and ₹85 crore at March. The shortfall was ₹2 crore in September despite a ₹5 crore cushion in March.
Illustrative example 5: Do not hide a subsidiary breach
Entity A holds ₹130 crore against ₹100 crore required. Entity B holds ₹42 crore against ₹50 crore required. An arithmetic group surplus of ₹22 crore hides B's ₹8 crore shortfall; present separate compliance information.
Illustrative example 6: Explain the comparative movement
Managed capital rises from ₹200 crore to ₹230 crore. Retained profit of ₹24 crore and qualifying funding of ₹10 crore are offset by a ₹4 crore distribution. The ₹30 crore increase is 15% of opening managed capital.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Obtain the current management report | Capital report used by key management personnel |
| 2 | Identify the capital perimeter | Entity and instrument list |
| 3 | Tie source balances to the accounts | Ledger and statement cross-reference |
| 4 | Explain inclusions and exclusions | Measure definition with line-by-line bridge |
| 5 | Describe objectives and processes | Policy, limits and management minutes |
| 6 | Compare the prior period | Prior note and reconciled movement |
| 7 | Identify external requirements | Applicable regulation or binding terms |
| 8 | Reperform every due test | Dated numerator, denominator and threshold |
| 9 | Explain breaches and consequences | Notices, contractual terms and remediation evidence |
| 10 | Check aggregation and other disclosures | Separate requirement schedules and final review |
Sixteen practitioner FAQs
1. Does Ind AS 1 impose one capital ratio?
No. The note explains the entity's approach and applicable external requirements.
2. Is managed capital always shareholders' equity?
No. Reconcile the measure used internally to book balances and describe differences.
3. Can subordinated debt be in managed capital?
Yes, if that reflects how management defines capital. Its accounting classification is a separate matter.
4. Can equity reserves be excluded?
Yes. Explain the rationale and quantify material exclusions.
5. Which internal information is relevant?
Use information provided to key management personnel to support the disclosures.
6. What if capital policy changed this year?
Describe the change in policy or measure and the quantitative change from the prior period.
7. Does year-end headroom prove full-year compliance?
No. Review compliance at all dates the external requirement applies.
8. Is a target from a board policy external?
No. Distinguish an internal objective from a requirement imposed by an external party.
9. How should a narrow surplus be shown?
Present the actual measure and limit. Explain significant constraints when needed for understanding.
10. Can two subsidiaries be combined?
Only where aggregation gives useful information and does not distort users' understanding.
11. Should different regulatory definitions be averaged?
Do not average unlike metrics into an apparently uniform result.
12. Is a breach followed by a waiver necessarily immaterial?
No. Assess the breach and consequences at the relevant dates, including what the waiver actually changes.
13. Can a breach have a consequence without a cash fine?
Yes. Restriction on distributions or a remediation obligation may be relevant, depending on the terms.
14. Does the note replace a debt classification review?
No. Apply the relevant balance-sheet classification and disclosure requirements independently.
15. Does an entity without external capital rules still disclose its policy?
The capital management disclosure objective and applicable qualitative and quantitative disclosures still matter.
16. What is the most useful audit trail?
Retain the management report, the definition bridge and a dated test schedule for each external requirement.
Official sources
ICAI 2025–26 compendium: Ind AS 1, paragraphs 134–136 ICAI compendium and applicable edition