Capital Maintenance


DEFINITION of 'Capital Maintenance'

An accounting concept based on the principle that income is only recognized after capital has been maintained or there has been a full recovery of costs. Capital maintenance has been reached if the amount of a company's capital at the end of a period is unchanged from that at the beginning of the period, with any excess amount treated as profit.

As capital maintenance is mainly concerned with an enterprise's definition of the capital sought to be maintained by it, the concept distinguishes between the enterprise's return on capital and its return of capital.

The two basic definitions of capital maintenance are financial capital maintenance and physical capital maintenance.

BREAKING DOWN 'Capital Maintenance'

According to International Financial Reporting Standards (IFRS), under the definition of financial capital maintenance, a profit is earned only if the amount of net assets at the end of a period exceeds the amount at the beginning of the period, excluding any inflows from or outflows to owners, such as contributions and distributions. It can be measured either in nominal monetary units or constant purchasing power units.

The definition of physical capital maintenance, according to the IFRS, implies that a profit is earned only if the enterprise's productive or operating capacity at the end of a period exceeds the capacity at the beginning of the period, excluding any owners' contributions or distributions.

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