Question

Week 1
The fundamental qualitative characteristics that financial information must possess to be useful to the primary users of general purpose financial reports—identified in the Conceptual Framework are ‘relevance’ and ‘faithful representation’.

Required:
a) Provide one example where information is relevant but not faithfully represented. (3 marks, maximum 100 words)
b) Provide one example where information is not relevant but is faithfully represented. (3 marks, maximum 100 words)
c) Provide one example where information is relevant and faithfully represented. (4 marks, maximum 150 words)

Answer 1

Solution a) Information is relevant but not faithfully represented

Example

There has been a fire accident in an entity. The damage caused by the accident is such that the entity can no longer follow the fundamental assumption of going concern. The management did not make proper estimation of the damage caused and continued with the going concern assumption.This is a relevant information considering its nature and materiality. The entire accounting method adopted by the entity would have to be changed in such a scenario. Since this information is not faithfully represented by giving the complete information, estimation and the consequences of the damage, decisions made on the basis of the financials presented may not be appropriate.

Solution b) Information is not relevant but is faithfully represented

Example

New managerial personnels were appointed in the company. The complete information regarding the appointment was disclosed in the financial reports. An information is said to be relevant if it influences the decisions of the users of the financials. A relevant information helps the users to estimate the future values or future performances of an entity and make appropriate decisions. The fact that new managerial personnels were appointed, even if omitted will not significantly make a difference to the decisions made by the users of the financials.

Solution c) Information is relevant and is faithfully represented

An entity had a pending litigation. It was almost confirmed that there would be an outflow of resources from the entity. The amount that the entity would have to pay is measurable and the amount is material. Thus the company created a provision for the amount to be paid and disclosed all the relevant information completely in the notes to accounts. This is a relevant information for the users of the financials and is faithfully represented by the entity by creating a provision and by disclosing complete information in the notes to accounts.