Corporate Accounting and Auditing · Conceptual Framework

Presentation, Disclosure and Concepts of Capital for CMA Inter

Updated 10 October 2026 · Fact-checked

Capital maintenance decides when an entity has earned profit. Under financial capital maintenance, profit arises only if closing net assets in money terms exceed opening net assets, after owner transactions. Under physical capital maintenance, profit arises only if productive capacity rises. Going concern and disclosure principles support how statements are prepared and communicated.

Understand Presentation, Disclosure and Concepts of Capital

The Conceptual Framework ends with ideas that sit behind every profit figure: what is the capital the entity wants to protect, and when can we say it has been protected? Only what is earned above that protected capital is profit.

The framework describes two concepts of capital. A financial concept treats capital as invested money or purchasing power. A physical concept treats capital as the productive capacity or operating capability of the entity. Para 8.2 says the choice should be based on the needs of users. If users care about nominal invested capital or its purchasing power, use the financial concept. If they care mainly about operating capability, use the physical concept.

These give two capital maintenance concepts (para 8.3). Under financial capital maintenance, profit is earned only if the money amount of net assets at the end of the period exceeds that at the start, after excluding distributions to and contributions from owners. It can be measured in nominal monetary units or in units of constant purchasing power. Under physical capital maintenance, profit is earned only if the physical productive capacity (or the resources or funds needed to achieve it) at the end exceeds that at the start, again after excluding owner distributions and contributions.

The main difference is how price changes on assets and liabilities are treated (para 8.6). Under physical capital maintenance, all such price changes are seen as changes in measuring productive capacity. They are capital maintenance adjustments that are part of equity, not profit (para 8.8). The physical concept needs current cost measurement; the financial concept does not need any particular measurement basis (para 8.5).

Two more areas are tested. Going concern (para 3.9): statements are normally prepared assuming the entity will continue for the foreseeable future, with no intention or need to liquidate or cease trading. If that fails, a different basis may be needed and the basis used must be described. Presentation and disclosure (paras 7.4 to 7.6): balance flexibility with comparability, use objectives to guide disclosure, prefer entity-specific information to boilerplate, and avoid needless duplication.

Key rules to remember

Profit under capital maintenance: Profit = Closing capital − Opening capital (after excluding distributions to and contributions from owners); Profit is the residual after expenses, including capital maintenance adjustments where appropriate (para 8.4). If expenses exceed income, it is a loss.
Financial capital maintenance: Profit if closing net assets (money) > opening net assets (money); Measured in nominal monetary units or constant purchasing power units. No specific measurement basis is required.
Physical capital maintenance: Profit if closing productive capacity > opening productive capacity; Needs the current cost basis. Price changes go to equity as capital maintenance adjustments.
Physical maintenance, working rule: Profit = Closing equity − Opening equity − Capital maintenance adjustment (owner transactions excluded); Study aid for sums: the adjustment is the increase in cost of replacing the opening capacity.
Going concern test: Neither intention nor need to liquidate or cease trading = going concern basis; If not, prepare on a different basis and describe it.

How to solve Presentation, Disclosure and Concepts of Capital questions

Use this order for both theory and numerical questions on capital and capital maintenance.

1Read what is asked: definition, comparison, choice of concept, or a profit calculation.
2Name the concept of capital involved: financial or physical, and link it to user needs (para 8.2).
3For a sum, find opening capital and closing capital on the stated basis (money, constant purchasing power, or current cost).
4Remove owner contributions and distributions from the change in capital.
5For physical maintenance, deduct the capital maintenance adjustment, shown in equity, to reach profit.
6State the profit or loss under each concept clearly and show the difference.
7For theory, add the going concern or disclosure principle if the question touches presentation, and quote the exact condition.
8Close with a one-line conclusion on which concept suits the users.

Quickest way: Compare-two-columns method

When to use it: Use for 'differentiate' questions and short numerical comparisons when time is tight.

Draw two columns: financial and physical.
Write four rows: capital means, profit arises when, price changes treated as, measurement basis.
Fill in: money or purchasing power vs productive capacity; money net assets rise vs capacity rises; part of profit vs adjustment in equity; any basis vs current cost.
For sums, compute total increase in net assets first, then subtract the adjustment for the physical column only.

Common mistakes in Presentation, Disclosure and Concepts of Capital

Saying physical capital maintenance can use any measurement basis.
Students mix up the two concepts.
Fix: Remember: physical needs current cost; financial needs no particular basis (para 8.5).
Treating price rises on assets as profit under physical maintenance.
Students apply the financial view to both.
Fix: Under physical maintenance these are capital maintenance adjustments in equity, not profit (para 8.8).
Forgetting to exclude owner contributions and distributions when computing profit.
Students compare opening and closing net assets directly.
Fix: Adjust the change in net assets for fresh capital introduced and dividends or drawings first.
Saying financial capital maintenance is only about nominal money.
The word 'money' is overread.
Fix: It can be measured in nominal monetary units or units of constant purchasing power.
Stating going concern as an absolute fact.
Students ignore the word 'normally'.
Fix: Write that statements are normally prepared on this assumption, and that a different basis, described in the statements, is used if liquidation is intended or needed.
Writing that the framework prescribes one accounting model.
Students assume a single required model.
Fix: The framework applies to a range of models. ICAI does not prescribe one except in exceptional cases such as hyperinflationary economies (para 8.9).

Worked examples

Example 1

Distinguish between financial capital maintenance and physical capital maintenance. When is each concept appropriate?

Show the solution

Financial: profit arises only if the money amount of closing net assets exceeds opening net assets, after excluding owner distributions and contributions.
Financial capital can be measured in nominal monetary units or constant purchasing power units, and needs no particular measurement basis.
Physical: profit arises only if closing physical productive capacity exceeds opening capacity, after excluding owner transactions.
Physical maintenance requires the current cost basis. Price changes on assets and liabilities are capital maintenance adjustments in equity, not profit.
Choice: use financial if users are mainly concerned with nominal invested capital or its purchasing power; use physical if they are mainly concerned with operating capability (para 8.2).

Answer: Financial maintenance protects money or purchasing power; physical maintenance protects productive capacity and treats price changes as equity adjustments. The users' main concern decides the choice.

Example 2

Mehta Traders began the year with net assets of ₹10,00,000 (one lot of stock, 1,000 units at ₹1,000 each). During the year the owner brought in no capital and withdrew nothing. At year end net assets are ₹12,00,000. Of the increase, ₹50,000 arises because the cost of replacing the 1,000 opening units rose from ₹1,000 to ₹1,050 each. Find profit under each concept.

Show the solution

Increase in net assets = ₹12,00,000 − ₹10,00,000 = ₹2,00,000.
No owner transactions, so no adjustment is needed.
Financial capital maintenance (nominal money): profit = ₹2,00,000.
Physical capital maintenance: capital maintenance adjustment = 1,000 × (₹1,050 − ₹1,000) = ₹50,000.
Physical profit = ₹2,00,000 − ₹50,000 = ₹1,50,000.
The ₹50,000 is shown in equity as a capital maintenance adjustment.

Answer: Profit is ₹2,00,000 under financial capital maintenance (nominal money) and ₹1,50,000 under physical capital maintenance, with ₹50,000 credited to equity as a capital maintenance adjustment.

Exam tips

Quote the paragraph ideas in your own words, especially the phrase 'after excluding any distributions to, and contributions from, owners'.
In differentiate questions, always include the price-change treatment, as that is the core difference.
For sums, show the capital maintenance adjustment as a separate line to earn step marks.
For MCQs, watch words like 'only', 'normally' and 'requires'. Physical requires current cost; financial does not require a particular basis.
If asked about going concern, mention the consequence: a different basis may be needed and must be described.

Practice questions from Conceptual Framework

Presentation, Disclosure and Concepts of Capital in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Presentation, Disclosure and Concepts of Capital: frequently asked questions

What is the difference between financial and physical capital maintenance?

Financial maintenance measures capital in money or constant purchasing power and counts profit when closing net assets exceed opening net assets. Physical maintenance measures productive capacity and counts profit only when capacity increases. Price changes are profit-related under financial but equity adjustments under physical.

Does the Conceptual Framework force one capital maintenance concept?

No. The choice depends on user needs. The framework applies to a range of accounting models, and ICAI does not intend to prescribe a particular model other than in exceptional circumstances, such as hyperinflationary economies.

What is the going concern assumption?

Financial statements are normally prepared assuming the entity will continue for the foreseeable future, with no intention or need to liquidate or cease trading. If such an intention or need exists, a different basis may be needed and must be described.

What are the presentation and disclosure principles in the framework?

Entity-specific information is more useful than standardised boilerplate. Duplication across parts of the statements is usually unnecessary and can reduce understandability. Standards should balance flexibility with comparability across periods and entities.