ExpertMedium2 marksMultiple Choice
ACCA · Question 04 · Qualitative Characteristics
Quantum AI, a tech startup, is developing a revolutionary algorithm. The directors want to capitalize $2 million of research costs as an intangible asset to make the statement of financial position look stronger. Which fundamental qualitative characteristic of financial information would be breached if they do this?
Quantum AI, a tech startup, is developing a revolutionary algorithm. The directors want to capitalize $2 million of research costs as an intangible asset to make the statement of financial position look stronger. Which fundamental qualitative characteristic of financial information would be breached if they do this?
Answer options:
A.
Timeliness
B.
Understandability
C.
Faithful representation
D.
Comparability
How to approach this question
Identify the fundamental qualitative characteristics (Relevance and Faithful Representation) and determine which relates to depicting the true economic substance.
Full Answer
C.Faithful representation✓ Correct
Faithful representation requires that financial information faithfully represents the economic phenomena it purports to represent. It must be complete, neutral, and free from error. Deliberately capitalizing research costs (which should be expensed) to inflate assets violates neutrality and free from error.
Common mistakes
Confusing fundamental characteristics (Relevance, Faithful representation) with enhancing characteristics (Comparability, Verifiability, Timeliness, Understandability).
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