IFRS authorize three concepts of capital maintenance

IFRS authorize three concepts of capital maintenance

The IASB´s Conceptual Framework for Financial Reporting (2010)

The following paragraphs remain the same as originally stated in the Framework (1989).

Concepts of Capital Maintenance and the Determination of Profit

Par. 4.59. The concepts of capital in paragraph 4.57 give rise to the following concepts of capital maintenance:

(a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

The Conceptual Framework (2010), Par 4.59.

The concepts of capital in the Conceptual Framework (2010), paragraph 4.57 give rise to the following three concepts of capital during inflation and deflation:

(A) Physical capital. See Par 4.57 & 4.58

(B) Nominal financial capital. See Par 4.59 (a).

(C) Constant purchasing power financial capital. See Par 4.59 (a).

The concepts of capital in Par 4.57 give rise to the following three concepts of capital maintenance during inflation and deflation:

(1) Physical capital maintenance: optional during inflation and deflation. The Current Cost Accounting model is prescribed in IFRS when the physical capital maintenance concept is implemented. See Par 4.61.

(2) Financial capital maintenance in nominal monetary units (Historical Cost Accounting): authorized in IFRS but not prescribed—optional during inflation and deflation. See Par 4.59 (a). Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy: it is impossible to maintain the real value of financial capital with measurement in nominal monetary units per se during inflation and deflation. IFRS should not be based on popular accounting fallacies.

(3) Financial capital maintenance in units of constant purchasing power; i.e. Constant Item Purchasing Power Accounting (CIPPA): authorized in IFRS but not prescribed—optional during inflation and deflation. See Par 4.59 (a).

Only capital maintenance in units of constant purchasing power can automatically maintain the existing constant purchasing power of capital constant during inflation, deflation and hyperinflation in all entities that at least break even—ceteris paribus—for an indefinite period of time. This would happen whether these entities own revaluable fixed assets or not.

Nicolaas Smith

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