Financial Reporting · Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS)

Measurement, Presentation and Disclosure, Capital Maintenance: Conceptual Framework (CA Final FR)

Updated 5 October 2026

The Conceptual Framework says elements are measured on a chosen basis: historical cost, or current value (fair value, value in use, fulfilment value, current cost). You pick the basis that gives the most useful information, considering relevance and cost. Income and expenses go to profit or loss, with OCI used only in limited cases. Capital maintenance decides what counts as profit.

Understand Measurement, Presentation and Disclosure, Capital Maintenance

Recognition decides whether an item enters the financial statements. Measurement decides at what amount. The Conceptual Framework does not prescribe one basis. It lists the bases and tells you how to choose.

There are two families. Historical cost uses the transaction price, updated over time for things like depreciation, impairment, and interest accrual on amortised cost. Current value bases reflect conditions at the measurement date. These are fair value (the exit price in an orderly transaction between market participants, as in Ind AS 113), value in use for assets and fulfilment value for liabilities (entity-specific present value of cash flows the entity expects to derive or to pay), and current cost. Current cost of an asset is the cost today of an equivalent asset, including the transaction costs that would be incurred. Current cost of a liability is the consideration that would be received for an equivalent liability, less the transaction costs that would be incurred.

To choose a basis, ask what information it gives about the asset or liability and about income and expenses, and how it affects the cash flows the entity is likely to generate. Consider the qualitative characteristics: relevance, faithful representation, and the cost constraint. The nature of the item matters too. An item that contributes to cash flows in combination with other assets (such as plant) leans towards historical cost or value in use. A financial asset held for trading leans towards fair value. If a basis creates a measurement mismatch, consider whether another basis removes it.

Presentation and disclosure work on one idea: communicate efficiently and effectively. The entity is the unit of communication, so the Framework defines the reporting entity as one that is required, or chooses, to prepare general purpose financial statements. It need not be a legal entity. It can be a portion of an entity or comprise more than one entity. Consolidated statements cover a parent and its subsidiaries. Unconsolidated statements cover the parent alone. Income and expenses are classified and included in the statement of profit or loss as the default. Only in exceptional cases, where it gives more relevant information or a more faithful representation, may a standard require items in OCI. Income and expenses included in OCI are recycled to profit or loss in a later period when this results in more relevant information or a more faithful representation. If there is no clear basis for identifying the period in which recycling would do that, they need not be recycled.

Concepts of capital are set out in Chapter 8 of the Conceptual Framework (2018), "Concepts of Capital and Capital Maintenance". You need these concepts for capital maintenance questions, so present them as part of the Conceptual Framework.

The concepts are of two types. Under the financial concept, capital is the invested money or purchasing power, equal to net assets or equity. Under the physical concept, capital is the productive capacity of the entity. Capital maintenance decides what profit is. Profit is earned only after the capital at the start of the period is kept intact. Financial capital maintenance can be in nominal monetary units or in units of constant purchasing power. Physical capital maintenance requires current cost measurement.

Key rules to remember

Measurement bases: Historical cost | Current value: fair value, value in use (assets) / fulfilment value (liabilities), current cost; Learn the two families and the four current value bases. Fair value is market-participant based. Value in use and fulfilment value are entity-specific.
Fair value: Price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date; It is an exit price. Transaction costs are not part of fair value.
Value in use / Fulfilment value: Present value of cash flows the entity expects to derive from an asset (value in use) or expects to pay to fulfil a liability (fulfilment value); Entity-specific. They reflect the entity's own expectations, not the market's.
Current cost: Asset: cost of an equivalent asset now, including transaction costs that would be incurred. Liability: consideration receivable now for an equivalent liability, less transaction costs that would be incurred; An entry value, unlike fair value, which is an exit value.
Financial capital maintenance: Profit = Closing net assets − Opening net assets (adjusted for owner contributions and distributions); Nominal units use no inflation adjustment. Constant purchasing power units adjust opening capital by a general price index.
Physical capital maintenance: Profit = Closing net assets at current cost − Opening productive capacity at current cost; Needs current cost for both closing net assets and opening capacity. The increase in prices of assets held is a capital maintenance adjustment in equity, not profit.
OCI rule: Default: all income and expenses in profit or loss. Exception: OCI only where a standard requires it for relevance or faithful representation; Items in OCI are recycled when this gives more relevant information or a more faithful representation. Where there is no clear basis for identifying the period, they need not be recycled.

How to solve Measurement, Presentation and Disclosure, Capital Maintenance questions

Use this sequence for any question on measurement, presentation, reporting entity or capital maintenance.

1Identify the heading: measurement basis, presentation (P&L vs OCI), reporting entity, or capital maintenance.
2For measurement, name the item and how it generates cash flows: alone, in combination with other assets, or by sale or transfer.
3List the candidate bases and define each in one line, marking whether it is entry or exit and market or entity specific.
4Test each against relevance, faithful representation and the cost constraint. Note any measurement mismatch or measurement uncertainty.
5For presentation, state the default of profit or loss, then check whether a standard requires OCI and whether recycling applies.
6For reporting entity or capital, apply the definition to the facts. For capital maintenance, compute opening and closing capital under the given concept and derive profit.
7State a clear conclusion in one sentence, linked to the facts.

Quickest way: Basis-selection shortcut

When to use it: Use this for short MCQs and for 3 to 5 mark theory answers that ask which basis suits a given item.

Ask: is the item sold or used? Sold or traded points to fair value. Used with other assets points to historical cost or value in use.
Ask: is it a liability to be settled by the entity itself? Fulfilment value is the entity-specific option.
Ask: does the question stress today's replacement price? That is current cost.
Ask: is it a profit question? Check the capital concept first, then subtract opening capital from closing capital.
Close with relevance and cost constraint in one line.

Common mistakes in Measurement, Presentation and Disclosure, Capital Maintenance

Calling fair value and current cost the same thing.
Both are current values, so they look alike.
Fix: Fair value is an exit price from a market participant view. Current cost is an entry price for the entity. For an asset it includes transaction costs that would be incurred; for a liability the consideration received is reduced by them.
Saying value in use applies to liabilities.
Students forget the liability equivalent has a different name.
Fix: Value in use is for assets. Fulfilment value is for liabilities. Both are entity-specific present values.
Claiming the Framework requires one measurement basis for all items.
Students expect a single rule.
Fix: The Framework describes bases and the factors for choosing. Specific Ind AS decide the basis for each item.
Treating OCI as a free choice for any gain.
OCI seems a convenient place for unrealised gains.
Fix: Profit or loss is the default. OCI is used only when a standard requires it. Items in OCI are recycled when that gives more relevant information or a more faithful representation, and need not be recycled if there is no clear basis for doing so.
Treating the reporting entity as always a registered company.
Students link entity with legal entity.
Fix: A reporting entity can be a portion of an entity or a group of entities. Consolidated statements cover the parent and subsidiaries.
Counting holding gains on assets as profit under physical capital maintenance.
Students apply the financial concept to every case.
Fix: Under physical maintenance, price increases are capital maintenance adjustments within equity. Only the excess is profit.

Worked examples

Example 1

Case: Zenith Ltd holds a machine bought for ₹50,00,000 that is used with other assets in its plant. A listed investment of ₹8,00,000 cost is held for short-term trading. Which basis is likely more useful for each, and why?

Show the solution

Machine: it generates cash flows together with other plant, and is not held for sale. A market exit price says little about how it contributes to cash flows.
So historical cost less depreciation and impairment, or value in use for impairment testing, gives relevant information at a reasonable cost.
Investment: its return comes from price movements and sale. Fair value is an exit price, so it shows what the entity could realise.
Fair value from a quoted price is also cheap and reliable to obtain, which supports the cost constraint.
Both choices meet relevance and faithful representation, and each is balanced against cost.

Answer: Machine: historical cost (depreciated), with value in use for impairment. Trading investment: fair value, because its cash flows come from sale and price change.

Example 2

Case: Opening net assets of Alpha Ltd on 1 April were ₹10,00,000 at historical cost. Closing net assets on 31 March were ₹13,50,000 at historical cost, and ₹13,90,000 when measured at current cost. No capital was contributed or distributed. General price index rose from 100 to 110. Replacement cost of the opening productive capacity rose to ₹10,80,000. Compute profit under (a) nominal financial capital maintenance, (b) constant purchasing power maintenance, (c) physical capital maintenance.

Show the solution

(a) Nominal: use the historical cost closing figure. Profit = 13,50,000 − 10,00,000 = ₹3,50,000.
(b) Constant purchasing power: opening capital restated = 10,00,000 × 110 ÷ 100 = ₹11,00,000. Profit = 13,50,000 − 11,00,000 = ₹2,50,000.
(c) Physical: keeping capacity intact needs ₹10,80,000 at current cost. Closing net assets must also be at current cost, which is given as ₹13,90,000. Profit = 13,90,000 − 10,80,000 = ₹3,10,000.
The ₹80,000 rise in the cost of opening capacity (10,80,000 − 10,00,000) is a capital maintenance adjustment in equity, not profit.
Check: total increase in net assets at current cost = 13,90,000 − 10,00,000 = ₹3,90,000 = profit ₹3,10,000 + capital maintenance adjustment ₹80,000.

Answer: (a) ₹3,50,000; (b) ₹2,50,000; (c) ₹3,10,000, using closing net assets at current cost of ₹13,90,000 and opening capacity cost of ₹10,80,000.

Exam tips

Write definitions of each measurement basis in one line, and state entry or exit and market or entity specific. Examiners reward the distinction.
In choose-the-basis questions, always link your choice to relevance, faithful representation and cost constraint.
For OCI, state the default first, then the exception and recycling, using plain words rather than a standard number.
For capital maintenance numericals, write opening capital under the concept first, then subtract it from closing net assets, and show the adjustment as a separate line.
Remember that the Conceptual Framework is not a standard and does not override a specific Ind AS.

Practice questions from Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS)

Measurement, Presentation and Disclosure, Capital Maintenance: frequently asked questions

What is the difference between fair value and value in use?

Fair value is a market participant exit price. Value in use is the entity-specific present value of cash flows it expects from using the asset and disposing of it. They can differ because the entity's expectations may differ from the market's.

How do I choose a measurement basis under the Conceptual Framework?

Consider what information each basis gives about the item and about income and expenses. Test it against relevance and faithful representation, then apply the cost constraint. Check how the item contributes to cash flows and whether a mismatch arises.

When is income reported in OCI?

Profit or loss is the default for all income and expenses. OCI is used only where a specific standard requires it, to give more relevant information or a more faithful representation. Such items are recycled to profit or loss when that gives more relevant information or a more faithful representation, but need not be if there is no clear basis for identifying the period.

What is the difference between financial and physical capital maintenance?

Financial maintenance keeps invested money or purchasing power intact, in nominal or constant purchasing power units. Physical maintenance keeps productive capacity intact and needs current cost. The two concepts can give different profit figures.