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ACCA Applied Knowledge · Financial Accounting · Qualitative characteristics of useful financial information

Kestrel Ltd enters a transaction that is not addressed by any IFRS Accounting Standard. Which statement is correct about how Kestrel should develop an accounting policy for it?

Management should use judgement and refer to the Conceptual Framework's definitions, recognition criteria and qualitative characteristics to develop a policy giving relevant, faithfully representative information. The transaction cannot be ignored, and tax rules or profit maximisation would not meet the neutrality and usefulness objectives.

  1. AManagement should use judgement, considering the Conceptual Framework definitions, recognition criteria and qualitative characteristicsCorrect
  2. BManagement should ignore the transaction until the IASB issues a standard
  3. CManagement should apply the tax treatment used in the local tax authority's rules
  4. DManagement should choose the treatment that gives the highest profit for the period

Explanation

Where no standard applies, management uses judgement to develop a policy that gives relevant and faithfully representative information, referring to the Conceptual Framework concepts. Ignoring the transaction would omit it from the financial statements. Tax rules and profit maximisation do not give useful information and would not be neutral.

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