Capital Maintenance in a Contemporary Context

Abstract

This paper provides an overview for understanding the concept of capital maintenance and its relation to measurement. While there is extensive prior literature on this issue the focus of this literature is to provide a taxonomy of various methods of inflation accounting. This paper summarises the issue of capital maintenance in a contemporary context (i.e., the International Accounting Standards Board’s Framework project). The conclusions are (1) that capital maintenance is a necessary (but not sufficient) adjustment for income to be determined, (2) that measurement and capital maintenance are independent concepts, (3) lifetime income is the same under various measurement methods but differs across concepts capital maintenance, (4) that items of other comprehensive income can be justified on the basis they represent the maintenance of operating capital and the recycling of these items should not be allowed, and (5) that current practice is mostly nominal dollar capital maintenance, but has other elements.

Keywords: capital maintenance, asset measurement, IFRS, conceptual framework, other comprehensive income, recycling inflation accounting

JEL Classification: M40, M41, M49