Faithful Representation and Neutrality
To be useful,
information must also be reliable. Information has the quality of reliability
when it 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.
Information may be relevant but so unreliable in nature or representation that
its recognition may be potentially misleading. For example, if the validity and
amount of a claim for damages under a legal action are disputed, it may be
inappropriate for the enterprise to recognize the full amount of the claim in
the Statement of Financial Position, although it may be appropriate to disclose
the amount and circumstances of the claim
Faithful Representation
To be reliable,
information must represent faithfully the transactions and other events it
either purports to represent, or could reasonably be expected to represent.
Thus, for example, a Statement of Financial Position should represent
faithfully the transactions and other events that result in assets, liabilities
and equity of the enterprise at the reporting date.
Most financial information is subject to some risk of being less than a
faithful representation of that which it purports to portray. This is not due
to bias, but rather to inherent difficulties either in identifying the
transactions and other events to be measured or in devising and applying
measurement and presentation techniques that correspond with those transactions
and events. In certain cases, the measurement of the financial effects of items
could be so uncertain that enterprises generally would not recognize them in
the financial statements. For example, although most enterprises generate
goodwill internally over time, it is usually difficult to identify or measure
that goodwill reliably. In other cases, however, it may be relevant to
recognize items and to disclose the risk of error surrounding their recognition
and measurement
Substance over Form
If information is
to represent faithfully the transactions and other events that it purports to
represent, it is necessary that they are accounted for and presented in
accordance with their substance and economic reality and not merely their legal
form. The substance of transactions or other events is not always consistent
with that which is apparent from their legal or contrived form. For example, an
enterprise may dispose of an asset to another party in such a way that the
documentation purports to pass legal ownership to that party. Nevertheless,
agreements may exist that ensure that the enterprise continues to enjoy the
future economic benefits embodied in the asset. In such circumstances the
reporting of a sale would not represent faithfully the transaction entered into
(if indeed there was a transaction)
Neutrality
To be reliable, the
information contained in the financial statements must be neutral, that is,
free from bias. Financial statements are not neutral if, by the selection or
presentation of information, they influence the making of a decision or
judgment in order to achieve a predetermined result or outcome
Prudence
Preparers of
financial statements, however
do have to contend with the uncertainties that inevitably surround many events
and circumstances, such as the collectability of doubtful receivables, the
probable useful life of plant and equipment and the number of warranty claims
that may occur. Such uncertainties are recognized by the disclosure of their
nature and extent and by the exercise of prudence in the preparation of the
financial statements. Prudence is the exercise of a degree of caution in making
the estimates required under conditions of uncertainty, such that assets or
income are not overstated and liabilities or expenses are not understated.
However, the exercise of prudence does not allow, for example, the creation of
hidden reserves or excessive provisions, the deliberate understatement of
assets or income, or the deliberate overstatement of liabilities or expenses.
If that were the case, the financial statements would not be neutral and,
therefore, not have the quality of reliability
Completeness
To be reliable, the
information in financial statements must be complete within the bounds of
materiality and cost. An omission can cause information to be false or
misleading and thus unreliable and deficient in terms of its relevance
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