Financial Vs Physical Capital Maintenance

Capital maintenance is a notion, which states that the earnings, that have been generated by a business at the end of financial year, will only be recognised if the company’s capital was maintained at the same level, from the start to the end of the financial year. Any surplus in capital, will be treated as income or profit

There are further two aspects to this approach. First, the financial capital maintenance, which according to IFRS (international Financial Reporting Standards) states that, if the financial amount of net assets (Total Assets Less Total Liabilities) of the business are greater at the last day of the financial period to the first day, then any difference will be recognised as profit. However, this approach does not consider, the increases and decreases in capital due to cash inflow or outflow by owners, such as contributions or distributions.

Another aspect, is the physical capital maintenance, which under (IFRS) in the conceptual framework (2010), Par 4.59 reports that, a company can only realise a profit, if the physical productive capacity, is greater at the end of the financial year, compared with the start of the financial year. Not considering any contributions or distributions in capital from the owner. An example of physical capital would be, segments of output produced daily.

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