Question

Listed below are two comments on accounting conventions. According to the IASB's Conceptual Framework, financial information must be either relevant or faithfully represented if it is to be useful.

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

Neither of the comments is correct; financial information must be relevant and faithfully represented, and materiality isn't limited to physical items. Also, assets include both tangible and intangible items, and banks often lend out funds listed as assets. The correct option is D.

Step-by-step explanation:

The correct answer is D Neither of them. According to the IASB's Conceptual Framework, financial information must be both relevant and faithfully represented to be useful, not either/or as the first comment suggests.

Additionally, materiality in accounting refers to the significance of transactions, events, or items to which users of financial statements can make economic decisions; it is not limited to items with a physical existence, as the second comment incorrectly states.

An asset is an item of value that a firm or an individual owns. This definition does not require that the asset has a physical form. Hence, intangible assets, such as intellectual property, can also be recognized on the balance sheet.

Lastly, the concept of money being listed as an asset on a bank balance sheet and not actually being in the bank can be attributed to the practice of fractional reserve banking, where banks lend out most of the funds deposited with them, keeping only a fraction as reserves. The correct option is D.