recognition

Question 1

core trade-off resulting in recognition issues

Answer 1

relevance vs reliability

Question 2

define relevance

Answer 2

new information to primary users
- information is relevant when it has confirmatory and predictive value

Question 3

define reliability

Answer 3

information is complete, neutral and free from error (unbiased)

Question 4

reasons for the trade-off

Answer 4

1. ambiguity -> distribution of future cash flows are unknown
2. information asymmetry and managerial incentives -> managers may use information to their advantage

Question 5

negative consequences of non-recognition

Answer 5

1. measurement error
2. non-comparability
3. lack of accountability
4. influence on managerial incentives
5. macroeconomic consequences

Question 6

potential benefit arising from non-recognition

Answer 6

conservatism: guard against managerial optimism and opportunistic behaviour

Question 7

what is measurement error

Answer 7

reported earnings are biased due to the mismatching of revenue from investment in intangible with costs from these investments

Question 8

what is non-comparability

Answer 8

inconsistency in accounting for intangibles: internally generated not recognised but externally acquired is recognised

Question 9

what is lack of accountability

Answer 9

not all intangibles biz have is recorded in b/s -> results in stewardship function being mitigated (immediate expense provides no info about proj development and obscures failures)

Question 10

what is influence on managerial incentives

Answer 10

create incentives to use r&d expenditure as EM tool (cut exp to raise net income) -> lower r&d investment and innovation in the economy

Question 11

what are some macroeconomic consequences

Answer 11

increase adverse selection and misallocation of resources

Question 12

criteria to recognise intangible asset

Answer 12

economic resource, control rights, past events, probability, reliability