Tuesday, 1 April 2014

Capital Maintenance feedback summary by the IASB

Purpose of paper 

1. This paper summarises the feedback received on: 

(a) the measurement section of the Discussion Paper A Review of the Conceptual Framework for Financial Reporting. 

(b) Capital Maintenance, discussed in paragraphs 9.45–9.54 of the Discussion Paper. 

2. This paper provides a high level summary of the comments received. 

Where appropriate, we will provide more detailed breakdown of the comments for future meetings. 

Capital Maintenance


58. The Discussion Paper stated that 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.

Summary of feedback

59. Most respondents either agreed with this approach or did not comment on it. Those who explicitly agreed with the approach stated that they had encountered few problems either with the capital maintenance concepts in the existing Conceptual Framework or with high inflation. Consequently, they argued that revising or updating the capital maintenance concepts in the Conceptual Framework should not be a priority.

60. A few respondents broadly agreed with the suggested approach to capital maintenance but suggested some changes to the existing guidance including:

(a) stating in the Conceptual Framework a preference for one of the concepts
of capital maintenance;

(b) removing reference to the physical capital maintenance concept because it
is not used in IFRS;

(c) shortening and focusing the discussion of capital maintenance;

(d) removing all discussion of capital maintenance because it was viewed as
irrelevant to most entities.

61. Some respondents disagreed with the suggested approach. They argued that the concept of capital maintenance is of fundamental importance to financial reporting.

"…the Conceptual Framework should articulate an ideal concept of capital maintenance and its relationship to the ideal measurement base. Accordingly, we do not support the proposal that leaves the existing descriptions and discussion of this issue largely unchanged until such time as any project on accounting for high inflation indicates a need for change.

We think this approach suggests a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework. 

We also consider that our current difficulties with profit measurement and OCI, which have issues of capital maintenance at their root clearly indicate a pressing need to resolve these issues."

CPA Australia and The Institute of Chartered Accountants Australia

62. A few respondents also noted that many jurisdictions are affected by high inflation. Consequently, the IASB should consider capital maintenance concepts when revising the Conceptual Framework. 

One respondent argued for greater use of capital maintenance as defined in terms of units of constant purchasing power.

63. A few respondents expressed the view that the IASB’s suggested approach to capital maintenance confuses two concepts:

(a) capital maintenance; and

(b) the measurement unit (nominal vs constant purchasing power), which is the subject of IAS 29 Financial Reporting in Hyperinflationary Economies

IASB Agenda ref 10G 

Copyright (c) 2014 IFRS Foundation

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