Comparing Physical to Financial Capital Maintenance

Compared to the concept of physical capital retention, when distinguishing capital revenue from capital revenue, the concept of financial capital retention is suitable for standard setting. The main argument for supporting the maintenance of important capital is that the information it provides has better predictive value, confirms its value, and is more complete. However, with the agency theory, the prospect theory, and the positive accounting theory, the neutrality and integrity of maintaining material capital will significantly damage the predicted value and confirm the value.

Pennsylvania 106. The concept of physical capital maintenance requires the basis of current measurement cost. However, in the concept of maintenance of financial capital, there is no need to use specific metrics. The basis of selection based on this concept depends on the type of financial capital the company is about to maintain. Pennsylvania 107. The main difference between the two concepts of capital maintenance are the effects of price fluctuations of physical assets and liabilities. Generally, an entity holds its capital if it has the same capital as at the beginning of the period. The amount needed to maintain capital beyond the beginning is profit.

Pennsylvania 109. Under the concept of important capital retention, when capital is defined by actual production capacity, the profit represents that capital increase during this period. Since all price fluctuations affecting corporate assets and liabilities are considered to be changes in the company's actual production capacity, they are considered capital maintenance adjustments and are part of the capital rather than profit. Pennsylvania 110. The choice of measurement basis and capital retention concept determines the accounting model used to prepare financial statements. Different accounting models, the degree of correlation and reliability will differ. Like other areas, management needs to balance the relevance and reliability. This framework applies to various accounting models and provides guidance on the creation and submission of financial statements built on selected models.

The concept of capital mentioned in the previous paragraph was premised on maintaining capital. Maintain financial capital - Gains and losses are calculated based on the financial value of net assets at the end of the fiscal year and financial differences. Net asset value at the beginning of the fiscal year (International Accounting Standard 2000, p. 72). The basis of fair value measurement is a new evaluation method in accordance with this concept. Important capital maintenance - the profit in this case concentrates on the company's production capacity