The accountant of Broken Bay Ltd decided to retain the historical cost of the entity's intangible assets because it was difficult to obtain fair value of these assets.This action is consistent ____________.
A)substance over form.
B)balancing of relevance and reliability.
C)accrual accounting.
D)cash accounting.
E)true and fair view.

Question

Quizplus · Accepted Answer

The accountant of Broken Bay Ltd decided to retain the historical cost of the entity's intangible assets because it was difficult to obtain fair value of these assets. This action is consistent with the balancing of relevance and reliability.
When accountants face challenges in measuring the fair value of assets accurately, they may opt to use historical cost as it provides a reliable measure that can be verified by supporting documentation such as purchase invoices or contracts. The historical cost is the original monetary value of an economic item. Historical cost accounting involves reporting assets and liabilities at their historical costs, which are not updated for changes in value.
Relevance and reliability are two fundamental qualitative characteristics of financial information according to many accounting frameworks, such as the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Relevance refers to the capacity of the information to influence the economic decisions of users by helping them evaluate past, present, or future events or confirming or correcting their past evaluations. Reliability refers to the degree to which information accurately reflects the economic phenomena it purports to represent.
In this case, the accountant has likely determined that the historical cost is more reliable than an uncertain fair value estimate, which could potentially mislead users of the financial statements. By choosing historical cost, the accountant is ensuring that the financial statements are based on verifiable and supportable data, even if this might sacrifice some relevance, as the historical cost may not reflect the current market conditions or the current value of the intangible assets.
Therefore, the accountant's decision aligns with the principle of balancing the relevance and reliability of the financial information presented in the financial statements.

The Accountant of Broken Bay Ltd Decided to Retain the Historical