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ACCA Strategic Professional · Strategic Business Reporting (International) · Discussion of issues in financial reporting

Orlin Group holds a patent whose carrying amount is based on historical cost. The finance director proposes to measure it at current value to improve relevance. Under the Conceptual Framework, which factor must the board consider when selecting a measurement basis?

The board should consider how the asset contributes to future cash flows and its characteristics, together with faithful representation and the cost constraint. The Framework does not prescribe one basis, nor allow choosing one to maximise assets or simply to maintain consistency regardless of relevance.

  1. AOnly the cost of preparing the information, because cost constraint overrides other factors
  2. BOnly the basis that gives the highest total assets, as this best shows the entity's resources
  3. CWhichever basis was used in the prior year, as consistency prevails over relevance
  4. DHow the asset contributes to future cash flows and the characteristics of the asset, together with faithful representation and the cost constraintCorrect

Explanation

The Framework says that selecting a measurement basis considers the qualitative characteristics and the cost constraint, and relevance depends on how the asset contributes to future cash flows and its characteristics. No single factor overrides the others, and selecting for the highest value is biased.

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