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CMA Intermediate · Corporate Accounting and Auditing · Conceptual Framework

A company incurs a cost that does not meet the definition of an asset, a liability or equity. Citing the Conceptual Framework on matching, which statement is correct?

The cost cannot be recognised in the balance sheet. The Conceptual Framework does not permit recognising items that fail the definitions of asset, liability or equity, and matching costs with income is not its objective, so deferral just to achieve matching is not allowed.

  1. AIt may be carried in the balance sheet so that the cost is matched with future income
  2. BIt may be carried in the balance sheet if management expects future sales
  3. CIt cannot be recognised in the balance sheet, because matching of costs with income is not an objective of the Conceptual FrameworkCorrect
  4. DIt must be shown as equity until the related income arises

Explanation

The Conceptual Framework does not allow recognition in the balance sheet of items that do not meet the definition of an asset, a liability or equity. Matching occurs only as a result of recognising changes in assets and liabilities; it is not an objective. Deferring the cost merely to match future income is therefore not permitted.

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