(The main CAPITAL MAINTENANCE portion of the IASB´s Discussion Paper A REVIEW OF THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING requesting comment letters. Capital maintenance is discussed in various paragraphs in the Discussion Paper. A search of the term CAPITAL MAINTENANCE in the Pdf file reveals all mentions of the term in the Discussion Paper.)
9.45 Concepts of capital maintenance are important, because only income earned in excess of amounts needed to maintain capital can be regarded as profit. Paragraph 4.59 of the existing Conceptual Framework describes 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 capacity) 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.
9.46 Most entities adopt a financial concept of capital maintenance. However, the existing Conceptual Framework does not prescribe a particular model of capital maintenance. The existing Conceptual Framework notes that management of an entity should exercise judgement and select the concept of capital maintenance that provides the most useful information to users of financial statements.
9.47 Increases and decreases in equity arising from capital maintenance adjustments would normally be reported directly in equity rather than in the statement of comprehensive income.
9.48 The concepts of capital maintenance are used in IAS 29 Financial Reporting in Hyperinflationary Economies.
Proposed approach to capital maintenance
9.49 The IASB notes that the concepts of capital maintenance are probably most relevant for entities operating in high inflation economies. The IASB plans to undertake research to determine whether to revise IAS 29. Consequently, the IASB believes that the issues associated with capital maintenance are best dealt with at the same time as a possible project on accounting for high inflation rather than as part of the Conceptual Framework project. As part of this work, the IASB may consider whether capital maintenance adjustments should continue to be presented in equity or whether they should be included in a separate category of OCI that is not recycled.
9.50 The IASB plans to include the existing descriptions and discussion of the concepts of capital maintenance in the revised Conceptual Framework largely unchanged until such time as any project on accounting for high inflation indicates a need for change.
Revaluations of property, plant and equipment
9.51 IAS 16 permits entities to revalue property, plant and equipment.78 If an entity elects to use the revaluation model, it accounts for its revalued items as follows:
(a) the item of property, plant and equipment is carried at its revalued amount less any subsequent accumulated depreciation and subsequent accumulated impairment losses;
(b) depreciation is based on the revalued carrying amount of the asset;
(c) revaluation gains are recognised in OCI and are accumulated in equity as a revaluation surplus (unless they reverse a revaluation decrease that was previously recognised in profit or loss);
(d) revaluation losses are recognised in profit or loss (unless a credit balance exists on the revaluation surplus for that asset, in which case the loss is recognised in OCI); and
(e) revaluation surpluses are not recycled to profit or loss on derecognition of the associated asset. However, an entity may transfer the revaluation surplus directly to another component of equity.
9.52 As noted in Section 8, presenting revaluations of property, plant and equipment in OCI may be inconsistent with some of the possible approaches to deciding what should be presented in OCI (in particular with the bridging concept described in Section 8). This is because the amounts reported in profit or loss are not the same as would be presented if the item were to be measured on a cost basis (depreciation reported in profit or loss is based on the revalued amount and revaluation surpluses are not recycled).
9.53 It could be argued that the revaluation model in IAS 16 was intended to be a form of capital maintenance adjustment. This would explain why depreciation reported in profit or loss is based on the revalued amount rather than cost and why revaluation surpluses are not recycled. However, reporting revaluation gains and losses in OCI is inconsistent with this view, because capital maintenance adjustments would normally be reported directly in equity. Indeed, prior to the introduction of OCI, revaluation gains and losses were reported directly in equity.
9.54 Given these factors, the IASB may at some point wish to consider whether to amend the revaluation model in IAS 16 (and IAS 38 Intangible Assets) to make it consistent with either the bridging concept or the capital maintenance concept. In developing this Discussion Paper, the IASB has not considered whether such changes would be appropriate.
78 IAS 38 Intangible Assets includes a similar revaluation model.
Questions for respondents
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.
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Paragraphs 9.45 to 9.54 above are almost exactly the same as the IASB´s
Draft Discussion Paper: Capital Maintenance dated April 2013
to which I submitted an
unsolicited comment letter dated 7 June 2013.