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ACCA Applied Skills · Financial Reporting · Recognition and measurement

Under the IASB Conceptual Framework, which of the following best describes the financial capital maintenance concept?

Under financial capital maintenance, profit arises only when the money amount of net assets at period end exceeds that at the start, after excluding distributions to owners and owners' contributions. Physical capital maintenance instead focuses on productive capacity.

  1. AA profit is earned only if the physical productive capacity of the entity at the end of the period exceeds that at the start, after excluding distributions and contributions from owners
  2. BA profit is earned only if the financial (money) amount of net assets at the end of the period exceeds that at the start, after excluding distributions to and contributions from ownersCorrect
  3. CA profit is earned only if total assets at the end of the period exceed total assets at the start, ignoring liabilities
  4. DA profit is earned only if revenue for the period exceeds cash expenses for the period

Explanation

Financial capital maintenance measures profit as the increase in the money amount of net assets over the period, after excluding owner distributions and contributions. Option 0 describes physical capital maintenance. Option 2 ignores liabilities, so it is not net assets.

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