The 1 physical capital maintenance concept is a fundamentally totally different capital maintenance concept compared to the two financial capital maintenance concepts, namely 2 financial capital maintenance in nominal monetary units traditional historical cost accounting and 3 financial capital maintenance in units of constant. The accounting concept is also essential to creditors to help them decide whether a company qualifies for a loan. It is argued that maintenance of capital in its current regime is no longer an appropriate concept to employ in safeguarding the interests of creditors. Capital maintenance is an accounting concept based on the principle that income is only recognized after capital has been maintained or there has been a full recovery of costs. Jan 19, 2008 konsep capital maintenance yang selama ini banyak diperdebatkan memiliki hubungan erat dengan laba. Physical concept of capital maintenance under these concepts, capital is equivalent to the productive capacity or operating capacity of the reporting entity. Financial and physical capital maintenance concept and their implications. Jan 30, 2014 the ifrs interpretations committee considered whether an entity is permitted to use the financial capital maintenance concept defined in terms of constant purchasing power units that is described in the conceptual framework for financial reporting when the entitys functional currency is not the currency of a hyperinflationary economy. The capital maintenance concept can be skewed by inflation, since inflationary pressure will inevitably increase net assets, even if the underlying amount of assets has not changed. In its simplest form itinfluences the treatment of the effects of price changes on assets and liabilities values.
The capital maintenance doctrine was developed by the courts to require companies to conserve their capital for the protection of creditors. The financial capital maintenance concept is that the capital of a company is only maintained if the financial or monetary amount of its net assets at the end of a financial period is equal to or exceeds the financial or monetary amount of its net assets at the beginning of the period, excluding any distributions to, or contributions from, the owners. The 2 concepts of capital under ifrs chartered education. Sep 06, 2019 capital maintenance is an accounting concept based on the principle that income is only recognized after capital has been maintained or there has been a full recovery of costs. However, in three of the six groups distinguished in table 5, companies in aggregate were net lenders in respect of trade credit so that the return on the extended capital maintenance definition is the lower or more negative. Ifrs is intended to be applied by profitorientated entities. The complex provisions on share capital and debentures are currently set out in part ii sections 37 to 79 of the co. The new companies act capital maintenance provisions.
Konsep capital maintenance yang selama ini banyak diperdebatkan memiliki hubungan erat dengan laba. The sources of such working capital are typically tuition, auxiliary fees and revenues, development dollars and investment income. Top 3 concepts of capital maintenance in an enterprise. A physical concept of capital is where capital is linked to the productive capacity of the entity. The doctrine of capital maintenance law company business partnership essay. One of the basic principles of uk company law is that share capital of the company including any premium paid on it over its nominal value is regarded as the permanent capital of the company and belongs to the company. In other words, it recognises the proprietorship concept of the enterprise while measuring income and capital, and applies valuation system which are in conformity with. To make the law more userfriendly and readable, the provisions will be reorganised into three smaller parts in the cb. Difference between financial and physical capital maintenance. The doctrine of capital maintenance stipulates a company must receive proper consideration for shares that it issues and that having received such capital it must not repay it to members except in certain circumstances. Jan 29, 20 examples of physical capital maintenance. It is necessary to break the concept down into its components. Capital rules continue to be debated in jurisdictions as diverse as the china and the united kingdom.
Capital maintenance has been reached if the amount of a companys capital at the end of a period is unchanged from that at the beginning of the period, with. Identifying the concept of capital and its categories. The ifrs interpretations committee considered whether an entity is permitted to use the financial capital maintenance concept defined in terms of constant purchasing power units that is described in the conceptual framework for financial reporting when the entitys functional currency is not the currency of a hyperinflationary economy. Concepts of capital maintenance in fair value accounting the choice of the concept of capital maintenance influences the financial positions in the balance sheets in many ways. Chapter 3 the capital maintenance regime background. Pengertian laba menurut suwardjono 2006 adalah tambahan kemampuan ekonomik yang ditandai dengan kenaikan kapital dalam suatu perioda yang berasal dari kegiatan produktif dalam arti luas yang dapat dikonsumsi atau ditarik oleh entitas pengusahapemilik kapital tanpa mengurangi kemampuan. On the other hand, a physical capital maintenance concept of capital is where the capital of an entity is regarded as its production capacity. A corporate balance sheet shows the value of the companys assets and the quantum of its liabilities to creditors. Dec 25, 2016 physical concept of capital maintenance under these concepts, capital is equivalent to the productive capacity or operating capacity of the reporting entity. The concept of capital has a restricted and technical meaning within company law.
Sep, 2017 home forums acca forums acca fr financial reporting forums financial capital maintenance concept vs physical capital maintenance concept this topic has 0 replies, 1 voice, and was last updated 2 years, 7 months ago by flychik07. Another aspect, is the physical capital maintenance, which under ifrs in the conceptual framework 2010, par 4. However, in three of the six groups distinguished in table 5, companies in aggregate were net lenders in respect of trade credit so that the return on the extended capital maintenance definition is. A rule prohibiting return of capital seeks to prevent a company from making distributions to its shareholders at any point at which the companys net assets do not exceed the stated value of its capital accounts. The concept of capital maintenance is of fundamental importance to a proper understanding of company law. Proposing a new concept of capital maintenance considers the accepted accounting practices included in ifrss. It is necessary, therefore, to determine the value of.
Fair value measurement of assets and issue of capital. Examining the new concept in different businesses that constitutes the sample of the study. Understand the components of the conceptual framework. Home forums acca forums general acca forums examples of physical capital maintenance. May 09, 20 the 1 physical capital maintenance concept is a fundamentally totally different capital maintenance concept compared to the two financial capital maintenance concepts, namely 2 financial capital maintenance in nominal monetary units traditional historical cost accounting and 3 financial capital maintenance in units of constant. Conceptual framework capital maintenance page 2 of 4 the period, after excluding any distributions to, and contributions from owners during the period. This includes the funds necessary to renew, repair or. A measurement of net income arrived at by comparing the amount of total equity at the end of a period to the amount of total equity at the beginning of the period. Capital maintenance is a concept used in accounting to refer to the principle that the income of a company is only fully recognized after being sure that capital has been maintained and all costs have been recovered. The financial leverage, capital structure, dividend policy, working capital management, financial decision, appraisal of financial performance of top management etc.
Fair value measurement of assets and issue of capital maintenance. Apr 28, 2018 the capital maintenance concept can be skewed by inflation, since inflationary pressure will inevitably increase net assets, even if the underlying amount of assets has not changed. In considering whether the rationale for capital maintenance is persuasive, it is important to determine the extent to which the legal capital rules operate as restriction on freedom of. Apr 03, 2020 the accounting concept is also essential to creditors to help them decide whether a company qualifies for a loan. Capital maintenance is an accounting concept based on the principle that income is only recognized after capital has been maintained or there has been a. Ias 29 applicability of the concept of financial capital. Financial vs physical capital maintenance yousuf hussain. The measurement of profit depends on the concepts of capital maintenance used by the company in preparing its financial statements. An important aspect of capital maintenance law company.
Capital maintenance adjustment under the financial real. It is not a straightforward concept and its precise scope is unclear. However, the existing conceptual framework does not prescribe a particular model of capital maintenance. An accounting concept based on the principle that income is only recognized after capital has been maintained or there has been a full recovery of costs. Many companies today get their starting capital from bank loans, and capital maintenance provides a point of reference for how long it will take a loan to be paid back.
Accounting concept that a profit can be realized only after capital of the firm has either been restored to its original level called capital recovery or is maintained at a predetermined level. A measurement of net income arrived at by comparing the amount of total equity at the end of a period. Thus, it is more accurate to adjust net assets for the effects of inflation. Capital maintenance adjustment under the financial real capital concept denis j. Financial capital maintenance concept money capital and purchasing power concept bothviews the capital of the enterprise from the standpoint of the shareholders as owners. The iasb framework offers the option of choosing between two concepts of capital maintenance. Identifying the concepts of capital maintenance and capital erosions 3. A companys capital adds up to all of the cash or the value of assets received by a company from investors in return for the companys shares. A term used to account for future expenses that a company expects to incur in order to maintain its fixed assets. It is an accounting concept based on the principle that income is only recognized after capital has been maintained, or in another scenario, when there is a full recovery of costs. Most entities adopt a financial concept of capital maintenance. African law the capital maintenance concept and share. The maintenance of capital doctrine has generated considerable debate in corporate law since its heyday in the late nineteenth century.
According to these concepts, profit for the period is measured as the excess of productive or operating capacity at the end over the operating or production capacity at the beginning. Pratt is a senior lecturer in accounting at the university of tasmania. This topic has 0 replies, 1 voice, and was last updated 7 years, 3 months ago by soar. A financial concept of capital is whereby the capital of the entity is linked t the net assets, which is the equity of the entity. Concepts of capital maintenance concepts of capital.
In some respects, the companies act still clings to this archaic and outdated concept, while in other respects, it boldly. The premise of the doctrine is that creditors provide credit on the basis of an express or implied representation that consideration received for shares the share capital shall be applied only. Home forums acca forums acca fr financial reporting forums financial capital maintenance concept vs physical capital maintenance concept this topic has 0 replies, 1 voice, and was last updated 2 years, 7 months ago by flychik07. Capital maintenance is attained if the amount of a companys capital at the end of a period is unchanged from that at the beginning of the period. Physical capital maintenance is very different from financial. These entities financial statements give information. Pengertian laba menurut suwardjono 2006 adalah tambahan kemampuan ekonomik yang ditandai dengan kenaikan kapital dalam suatu perioda yang berasal dari kegiatan produktif dalam arti luas yang dapat dikonsumsi atau ditarik oleh entitas pengusahapemilik kapital tanpa mengurangi.
Thus, it is more accurate to adjust net assets for the effects of inflation in order to see if capital maintenance has occurred. Equity shareholders of a company enjoy two important privileges. The concept of cost of capital plays a vital role in decisionmaking process of financial management. Comprehend the tradeoff problems that standard setters face. Mar 10, 2018 another aspect, is the physical capital maintenance, which under ifrs in the conceptual framework 2010, par 4. The rise and fall of the capital maintenance doctrine in. Capital maintenance rules and their effectiveness as a form of creditor protection.
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