ExpertMedium2 marksMultiple Choice
ACCA · Question 01 · The context and purpose of financial reporting
Section A
BioGenix Ltd, a pharmaceutical startup, has spent $2 million on researching a new synthetic protein. The directors want to capitalize this cost as an intangible asset to improve the appearance of the statement of financial position, even though the project has not yet demonstrated technical feasibility.
Which fundamental qualitative characteristic of financial information would be breached if BioGenix capitalizes these research costs?
Section A
BioGenix Ltd, a pharmaceutical startup, has spent $2 million on researching a new synthetic protein. The directors want to capitalize this cost as an intangible asset to improve the appearance of the statement of financial position, even though the project has not yet demonstrated technical feasibility.
Which fundamental qualitative characteristic of financial information would be breached if BioGenix capitalizes these research costs?
Answer options:
A.
Relevance
B.
Faithful representation
C.
Comparability
D.
Understandability
How to approach this question
Recall the fundamental qualitative characteristics from the Conceptual Framework (Relevance and Faithful Representation). Consider which one deals with accurately depicting economic reality.
Full Answer
B.Faithful representation✓ Correct
According to the Conceptual Framework, the fundamental qualitative characteristics are relevance and faithful representation. Capitalizing an expense that should be written off (because it doesn't meet development criteria) means the financial statements do not faithfully represent the company's financial position.
Common mistakes
Students often confuse fundamental characteristics (Relevance, Faithful Representation) with enhancing characteristics (Comparability, Verifiability, Timeliness, Understandability).
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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