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The distinction between financial capital maintenance and physical capital maintenance.

According to IASB conceptual framework, the concept of capital maintenance is concerned with how an entity defines the capital it seeks to maintain. The concept of capital maintenance gives rise to financial capital maintenance and physical capital maintenance. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of financial statements.

  • Financial capital maintenance: Under this concept, a profit is earned only if the financial (or money) amount of net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distribution to and contribution from owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constrained purchasing power.
  • Physical capital maintenance: under this concept profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resource or funds needed to achieve that capacity) at the end of the period  exceeds the physical productive capacity at the beginning of the period, after excluding any distribution to, and contribution from, owners during the period.

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