Question

Listed below are two comments on accounting conventions.

1 According to the IASB's Conceptual Framework, financial information must be either relevant or faithfully represented if it is to be useful.
2 Materiality means that only items having a physical existence may be recognised as assets. Which, if either, of these comments is correct?
A 1 only
B 2 only
C Both of them
D Neither of them

Answer 1

Only the first comment is correct, stating that financial information must be relevant and faithfully represented to be useful.

The second comment is incorrect; materiality refers to the importance of information in decision-making, not the physical existence of assets.

Step-by-step explanation:

Between the two comments given about accounting conventions, the correct option is A: Comment 1 only. According to the IASB's Conceptual Framework, for financial information to be useful, it must be both relevant and faithfully represented.

Relevance means the information can make a difference in decision-making, while faithful representation means the information accurately reflects the economic phenomena it purports to represent. Thus, the first comment is accurate.

The second comment is incorrect. Materiality in accounting means that information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity. It does not mean that only items with physical existence may be recognized as assets.

Assets can be both tangible and intangible items of value that a firm or an individual owns, such as patents, trademarks, or goodwill. Therefore, option B: Comment 2 only is not accurate.