Question

Do you believe that the statement of conservatism is consistent with:

a) the physical capital maintenance concept; Please give 4 reasons and Explain

b) the financial capital maintenance concept? Please give 4 reasons and Explain

Kindly post in order for me to copy and paste to word and list references

Answer 1

Physical Capital Maintenance

Physical capital maintenance is not concerned with the cost associated with the actual maintenance required on tangible items, such as equipment. Instead, it focuses on a business's ability to sustain cash flows into the future by maintaining access to income-generating assets in use within the business's infrastructure.

The definition of physical capital maintenance, according to the IFRS, implies that a profit is earned only if the enterprise's productive or operating capacity at the end of a period exceeds the capacity at the beginning of the period, excluding any owners' contributions or distributions.

Capital Maintenance and Inflation

Inflation has the ability to skew the value of net assets even when the underlying asset has not changed in quantity or condition. For businesses operating in a hyperinflationary environment, adjusting values to reflect the rate of inflation properly may be required.