ExpertMedium2 marksMultiple Choice
ACCA · Question 04 · The Qualitative Characteristics of Financial Information
CloudSync Inc, a tech startup, is developing a new proprietary algorithm. The directors want to capitalize $2 million of research costs to make the Statement of Financial Position look stronger. Which fundamental qualitative characteristic would be violated if they proceed?
CloudSync Inc, a tech startup, is developing a new proprietary algorithm. The directors want to capitalize $2 million of research costs to make the Statement of Financial Position look stronger. Which fundamental qualitative characteristic would be violated if they proceed?
Answer options:
A.
Comparability
B.
Timeliness
C.
Faithful representation
D.
Understandability
How to approach this question
Recall the two fundamental qualitative characteristics: Relevance and Faithful Representation. Deliberate manipulation violates neutrality, a component of faithful representation.
Full Answer
C.Faithful representation✓ Correct
Faithful representation requires financial information to be complete, neutral, and free from error. Deliberately capitalizing research costs (which must be expensed under IAS 38) to inflate assets is a lack of neutrality and constitutes an error, thus violating faithful representation.
Common mistakes
Selecting comparability because it makes the company look different from peers, but the root issue is the lack of faithful representation.
Practice the full ACCA FA — Financial Accounting Practice Exam 4
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