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ACCA Strategic Professional · Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework

Under the Conceptual Framework, Kavu Ltd has a licence whose future economic benefits are very uncertain, with a probability of inflow of only 10%. The licence cost 5 million dollars and is a purchased right. Which statement best reflects the Conceptual Framework's recognition approach?

The Conceptual Framework has no fixed probability threshold for recognition. An item meeting the asset definition is recognised if doing so gives relevant information and a faithful representation. Low probability of inflow alone does not prohibit recognition, although it may affect relevance and measurement uncertainty.

  1. AAn asset is recognised only if recognition provides relevant information and a faithful representation, and low probability does not by itself prevent recognition of an asset that meets the definitionCorrect
  2. BAn asset is recognised only when inflow of benefits is virtually certain
  3. CAn asset is never recognised if probability is below 50%
  4. DAn asset is recognised if its cost can be measured, whatever its relevance

Explanation

The 2018 Conceptual Framework removed a fixed probability threshold. Recognition depends on whether it gives relevant information and a faithful representation, including considering measurement uncertainty. Low probability may still lead to recognition if the asset meets the definition and information is useful. Requiring virtual certainty or 50% reflects older or incorrect thresholds.

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