QUESTION 7
The International Financial Reporting Standards (IFRSs) Framework recognizes relevance and reliability as some of the quantitative characteristics of financial statements.
Required:
Distinguish between relevance and reliability in the context of IFRSs Framework.
Financial information is said to be relevant if it would influence economic decisions. This is achieved if the information has predictive or confirmatory value.
Reliable financial information is achieved when information provided is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent.
List and briefly explain five attributes of reliable financial statements as promulgated in the IFRSs framework.
- Faithful representation
The information must represent faithfully the transaction and other events it either purports to represent or could reasonably be expected to represent
- Substance over form
It is necessary that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form.
- Neutrality
The information contained in financial statements must be neutral, that is, free from bias.
- Prudence
Uncertainties should be recognized by disclosure of their nature and extent and by the exercise of prudence in the preparation of financial statements. Prudence is the degree of caution required in making estimates such that gains or assets are not overstated and losses and liabilities are not understated.
- Completeness
Information in financial statement must be complete within the bounds of materiality and cost
