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Chapter 7

Capital maintenance

2.1 Alternatives to historical cost accounting

There are two main forms of current value accounting which seek to tackle the
disadvantages of historical cost accounting.

 Constant Purchasing Power (CPP)

Figures in the financial statements are adjusted to reflect amounts with the same
purchasing power, using a general price index.

In this way the financial statements reflect the impact of inflation, although it is only a
general inflationary impact.

 Current Cost Accounting (CCA)

All costs in the statement of profit or loss are adjusted to show the value of assets
consumed during the period, based on current rather than historical values.

The statement of financial position shows the current value of inventory and non-
current assets.

2.2 Capital

An entity can adopt financial or physical concepts for capital.

 Financial – capital is viewed as amounts invested (in either historical cost or
purchasing power terms).

 Physical – capital is viewed as the productive capacity of an entity.

2.3 Financial capital maintenance

Financial capital maintenance seeks to preserve the value of shareholders’ funds,
either in monetary terms (historical cost) or real terms (constant purchasing power).

2.4 Physical capital maintenance

Physical capital maintenance seeks to preserve sufficient shareholders’ funds to
allow the business to continue to operate at current levels of activity, achieved by
some form of CCA, adjusting for specific price changes.

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