Question

Which statement is correct regarding IFRS?

1. An advantage of the nature-of-expense method is that it is simple to apply because allocations of expense to different functions are not necessary.
2. The function-of-expense approach never requires arbitrary allocations.
3. An advantage of the function-of-expense method is that the allocation of costs to the varying functions is rarely arbitrary.
4. IFRS requires the use of the nature-of-expense approach.

Short answer

Option a is the correct answer.

Step-by-step solution

Meaning of Expenses

In accounting, the term expense refers to the cost incurred by a business entity for acquiring goods or services that further facilitate generating revenues. Expenses are deducted from the income to obtain actual profit or loss.

The explanation for the correct answer

The nature-of-expense method facilitates the business concerns to bifurcate the respective expenses into related categories. For instance, costs related to materials are classified under raw materials. IFRS does not require the functional classification of the expenses.

The explanation for the incorrect answer

The function-of-expense method requires arbitrary allocations associated with different expenses. Also, the function-of-expense method combines the items linked with expenses according to the respective activities. IFRS does not specify the approach businesses use but allows them to choose any suitable method.