Conceptual Framework Discussion Paper: Notable Comment Letter from The Linde Group

Conceptual Framework Discussion Paper: Notable Comment Letter from The Linde Group

Question 26 - Other Issues:

Capital maintenance

Capital maintenance is discussed in paragraphs 9.45–9.54. The IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.

Do you agree? Why or why not? Please explain your reasons

"The concept of capital maintenance drives virtually all recognition and measurement rules that exist in a set of accounting rules (except for most disclosure requirements). Therefore the prescription of capital maintenance philosophy behind is the nucleus of all that follows and should be named and illustrated at the beginning of the framework. The theoretically most relevant sort of capital maintenance is the maintenance of earnings power. 

This means that a net gain is only given if the dcf value of the company has changed positively. Given that such a concept of capital maintenance is impracticable, IFRS should at least aim at an approximation to this und the restriction of inter-subjective provability. This means that cost accounting for a machine for instance represents an approximation of the earnings power of this machine if you assume that – at the time of acquisition the maximum purchase price for the machine from the company’s perspective was determined on the basis of a rationale decision process and state of the art valuation techniques in place so that the acquisition cost do not exceed the earning potential within the company. Under these conditions the price paid by the company for the acquisition of the machine represents an observable and therefore verifiable minimum earnings contribution of the asset to the overall earning power of the company. Depreciation then represents a – also very rough but well verifiable – roll forward of this approximated earning contribution value. Once there is evidence that this value is overstated it has to be corrected to the correct amount in the way of impairment. 

In the light of such a capital maintenance concept that only sacrifices earning power contribution for sake of verifiability, the definition of unit of account can be refined more precisely and the basic assumptions for definition and recognition can be derived. Therefore we would plead for giving this point more prominence." 

The complete comment letter is available HERE dated 2013-12-09 on Page 1.