Question

Phase A of the joint FASB and IASB conceptual framework project stipulates the desired fundamental and enhancing qualitative characteristics of accounting information. Several constraints impede achieving these desired characteristics. Answer each of the following questions related to these characteristics and constraints.

1.
Which constraint would allow a company to record the purchase of a $120 printer as an expense rather than capitalizing the printer as an asset?



2.
Donald Kirk, former chairman of the FASB, once noted that " . . . there must be public confidence that the standard-setting system is credible, that selection of board members is based on merit and not the influence of special interests . . ." Which characteristic is implicit in Mr. Kirk's statement?



3.
Allied Appliances, Inc., changed its revenue recognition policies. Which characteristic is jeopardized by this change?

Answer 1

Answers with Explanations:

Part 1. The concept of materiality gives an edge to not record a purchase of printer worth $120 as an asset because the amount is very small. Materiality says that if the value of a transaction is very small then it can be classed in other way because it does not effect the decision making of the users of financial statements.

Part 2. Neutrality is implicit because the decision maker value the words of the chairman's statement because he is independent of the executive directors so the shareholders expect him to be a neutral person.

Part 3. Consistency would be jeopardized because the previous year data now can not be compared with the current year data. To tackle such issues the standard says that the previous year data must also change its revenue recognition criteria and the difference due to changes in policy must be reflected in the previous financial statements.