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BBA LLB   01 March 2021

Corporate doubt

What is the difference between IFRS vs legal maintenance of capital?



Learning

 1 Replies

Kevin Moses Paul   02 March 2021

The IFRS maintenance of capital concept is defined in the conceptual framework (4.59). We can restrict attention to financial capital maintenance:
Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

On the other hand, legal capital maintenance can be described as the doctrine that forbids a corporation to return capital to its shareholders, unless authorized by law (e.g., sanctioned reduction of capital).

The corporation is only free to pay profits to the shareholders.

In my opinion, the two definitions of capital maintenance represent slightly different approaches. The first one takes the owners' point of view (you should not loose your money which means equity value should not fall) while the other is more focused on creditor protection - the share capital (but not all equity) should be a buffer for creditors claims.

Hope It Helps

Regards
Kevin M. Paul

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