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Thursday, 9 January 2014

Institute of Chartered Accountants Australia and CPA Australia recognise three concepts of capital maintenance authorised in IFRS

The Institute of Chartered Accountants Australia and CPA Australia recognise three concepts of capital maintenance authorised in IFRS

ICA Australia and CPA Australia in their combined comment letter to the IASB´s Capital Maintenance Discussion Paper recognised the two major concepts of capital and the three specific concepts of capital maintenance authorised in IFRS.

In their answer to Question 11 they state:

"The IASB should express clearly its view on the issues of the business enterprise and the concept of capital. In the case of the former, does it support a proprietary or entity view? In the case of the latter does it support a (i) financial or (ii) physical concept of capital? We would then like the measurement section to develop the link between the ideal concept of capital, the ideal concept of capital maintenance and the resulting selection of a measurement basis that is the consequence of applying those concepts. 

For example, the Board may determine that in the course of determining the appropriate measure for profit, the ideal concept of capital maintenance is 

(1) the maintenance of financial capital in money termsIt would therefore follow that the appropriate measurement base is historical cost. 


Alternatively, the Board may determine that the ideal concept of capital maintenance is: 


(2) the maintenance of financial capital in real terms with the resulting selection of entry price as a measurement base or 


(3) maintaining the productive (operating) capacity of the entity with the resulting selection of an exit price as the appropriate measurement base."
 

ICA Australia and CPA Australia thus recognise that the three specific concepts of capital maintenance authorised in IFRS are:

(I) Financial capital maintenance in nominal monetary units (Historical Cost Accounting) during inflation and deflation.

(II) Financial capital maintenance in units of constant purchasing power under which the real value (constant purchasing power) of capital can generally only be maintained constant in terms of an index that recognises all - at least daily - changes in the general price level (normally a Daily CPI) during inflation and deflation.

(III) Physical capital maintenance under which the physical capital is maintained in terms of physical units of output per day.


The complete comment letter is available HERE dated 2014-01-06 on Page 1.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.