(a) To be useful to the user of the financial statements, financial information must faithfully represent the transactions and events from which the financial statements are derived. In essence this means that the financial statements give an honest, true and fair account of the assets, liabilities, income and expenses of the reporting entity.
The IASB Conceptual Framework for Financial Reporting states that a perfectly faithful representation would be complete, neutral and free from error.
Completeness – A complete depiction includes all information necessary for a user to understand the financial data being depicted. Quite simply this means that all material transactions and events that should have been accounted for have indeed been accounted for i.e. there are no omissions 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 to the user of the financial statements.
Neutrality – A neutral depiction is without bias in the selection and presentation of financial
information. Financial statements are not neutral if, by the selection or presentation of information,
they influence the making of a decision or judgement in order to achieve a predetermined result or
outcome.
Free from error – Faithful representation does not mean accurate in all respects. Free from error
means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. For example, a representation of an estimate of a provision can be faithful if it is clearly described as an estimate and no errors have been made in selecting and applying the process used to determine the figure.
The principle of ‘substance over form’ is also relevant to faithful representation. It means that
financial statements should report the underlying commercial reality of transactions (i.e. their
substance) rather than the strict legal position (the form). Thus, for example, regarding the question
of whether the reporting entity should recognise an asset or not, the legal ownership of the asset is
irrelevant. A faithful representation of the underlying transaction is achieved by recognising the asset in the financial statements of the entity which has control and access to the economic benefits of the asset and exposure to the risks that go with owning the asset, not the legal title itself. |
