Suggested amendments to The Conceptual Framework for Financial Reporting

Suggested amendments to The Conceptual Framework for Financial Reporting

In The Conceptual Framework for Financial Reporting (2010)

Concepts of capital maintenance and the determination of Profit

Paragraph 4.59, 4.62 and 4.63 should be amended as follows:

4.59 Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

The concepts of capital in paragraph 4.57 give rise to the following three concepts of capital maintenance:

(a)               Financial capital maintenance in nominal monetary units

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.

(b)                Financial capital maintenance in units of constant purchasing power

Under this concept a profit is earned only if the constant purchasing power of the net assets at the end of the period exceeds the constant purchasing power of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

(c)               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.

4.62 The principal difference between the three concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained the constant purchasing power of its capital if it has as much constant purchasing power capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the constant purchasing power of its capital at the beginning of the period is profit.

Nicolaas Smith

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