ExpertEasy2 marksMultiple Choice
ACCA · Question 01 · The Conceptual Framework
Section A
ByteFlow, a rapidly growing tech startup, has recently developed a proprietary algorithm. The directors wish to capitalize the entire $500,000 spent on the project to boost the statement of financial position, arguing that this provides the most 'relevant' information to potential venture capitalists. However, $200,000 of this was spent on early-stage research before technical feasibility was established.
According to the IASB's Conceptual Framework, which fundamental qualitative characteristic is primarily compromised if ByteFlow capitalizes the entire $500,000?
Section A
ByteFlow, a rapidly growing tech startup, has recently developed a proprietary algorithm. The directors wish to capitalize the entire $500,000 spent on the project to boost the statement of financial position, arguing that this provides the most 'relevant' information to potential venture capitalists. However, $200,000 of this was spent on early-stage research before technical feasibility was established.
According to the IASB's Conceptual Framework, which fundamental qualitative characteristic is primarily compromised if ByteFlow capitalizes the entire $500,000?
Answer options:
A.
Relevance
B.
Faithful representation
C.
Comparability
D.
Understandability
How to approach this question
Recall the two fundamental qualitative characteristics from the Conceptual Framework: Relevance and Faithful Representation. Consider what happens when an entity deliberately misclassifies an expense as an asset.
Full Answer
B.Faithful representation✓ Correct
Under the IASB Conceptual Framework, the two fundamental qualitative characteristics are relevance and faithful representation. By capitalizing research costs (which IAS 38 requires to be expensed), ByteFlow is not faithfully representing its financial position, as it is overstating assets and understating expenses. The information is not free from error or neutral.
Common mistakes
Students often confuse fundamental characteristics (Relevance, Faithful Representation) with enhancing characteristics (Comparability, Verifiability, Timeliness, Understandability).
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