a. Understandability means companies should make efforts to enable users to understand the financial statement. However, the users are assumed to have reasonable knowledge.
Relevance means information should be relevant to the needs of decision makers. Relevance will be affected by nature and materiality. And this characteristic may have predictive value or confirmatory value.
Reliability has two main components:
1) Information is free from material error and bias
2) Faithful representation: financial statements have the characteristics that they faithfully represent the transactions and other events that have occurred. An essential element of faithful representation is “substance over the form”
And it may also include neutrality, prudence, completeness.
Comparability include comparable through time and with other entities
b. (i) This relate to reliability. The substance of the transaction is a kind of loan instead of sales and earning of revenue. Moris should account for the substance of the transaction and substance over the form is an element of faithful representation, which is also a component of reliability
(ii) This relate to comparability. Moris can’t change depreciation method without any substantial reason since the change of accounting policy may affect the comparability of Moris’ financial information.
(iv) This relate to relevance. An important nature of relevance is it has both predictive value and confirmative value. So it is related to historical and current information. Moris should separately reflect the gain/loss on revaluation so that users of financial information can differentiate it from normal operating gain/loss.
