The constant purchasing power (real value) of capital needs to be maintained constant during low inflation and deflation and not only during high inflation and hyperinflation as it is generally accepted.
‘It is essential to the credibility of financial reporting to recognize that the recovery of the real cost of investment is not earnings — that there can be no earnings unless and until the purchasing power of capital is maintained.’
FAS 33 1979: 24
The above statement refers to low inflation and deflation too.
The following is Question 26 regarding Capital Maintenance in the IASB´s Discussion Paper on the Conceptual Framework:
No company in the world knows whether it maintained in the past and currently maintains the constant purchasing power of its capital constant during low and high inflation and deflation. No company in the world does that calculation during low and high inflation and deflation. No-one knows.
Financial capital maintenance in nominal monetary units during 2 percent annual inflation - mistakenly regarded as price stability in the US and European Monetary Union (and everywhere else) - results in the erosion (destruction) of the constant purchasing power (real value) of equity in that portion of equity that is not covered by the REAL value of net assets. 100% of equity being equal to 100% of net assets IN NOMINAL MONETARY TERMS (i.e., balancing the books under financial capital maintenance in nominal monetary units under the Historical Cost Accounting model) does not guarantee that the real value (constant purchasing power) of equity is being maintained constant during low and high inflation and deflation.
The following are the answers of some respondents to Question 26. It can be seen that they mistakenly believe that capital maintenance only applies as from the onset of high inflation and that it is not required during low inflation.
1. AUSTRALASIAN COUNCIL OF AUDITORS‐GENERAL
ACAG has no view on this issue. The Australian public sector has not been in a high inflation environment for many years and the capital maintenance paragraphs in the existing Conceptual Framework are rarely used.
It is very clear from the above that concepts of capital maintenance are rarely used during low inflation in Australasia.
This view that the capital maintenance paragraphs in the existing Conceptual Framework are rarely used is a very good overall summary regarding capital maintenance during low inflation and deflation, not only in Australasia, but also in the world economy.
See also: IASB has "a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework"