ACCA Strategic Professional · Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework
Harlow Co holds a portfolio of bonds. Its business model is to hold the bonds and collect contractual cash flows, and it argues that fair value changes are irrelevant to users. Under the Conceptual Framework, which statement about measurement basis selection is most consistent?
The measurement basis should be chosen by considering relevance, including how the asset contributes to future cash flows and its characteristics, along with faithful representation and the cost constraint. The Framework does not mandate one basis for every item, and profit maximisation is not a valid criterion.
- AHistorical cost must always be used because it is the only verifiable basis.
- BFair value must always be used because it provides the most relevant information for every asset.
- CThe basis is chosen by management based on whichever gives the highest profit.
- DThe measurement basis should be selected considering relevance, determined by how the asset contributes to future cash flows, and faithful representation, together with cost constraints.Correct
Explanation
The Framework says that in selecting a measurement basis one considers the nature of the information produced in both the statement of financial position and performance, including how the asset contributes to future cash flows and the characteristics of the asset. Cost constraint also applies. No single basis is mandated for all items, and choosing for profit would breach neutrality.
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