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ACCA Applied Knowledge · Financial Accounting · Qualitative characteristics of useful financial information

A company includes in its annual report a forecast of next year's profit, clearly described as an estimate, with the assumptions and the range of possible outcomes explained. Which statement is correct about faithful representation?

The estimate can be a faithful representation if it is clearly described as an estimate and its assumptions and limitations are explained. Free from error does not mean perfectly accurate, so uncertainty does not prevent faithful representation provided the process is properly applied and disclosed.

  1. AThe estimate can still be a faithful representation if it is clearly described and its limitations are explainedCorrect
  2. BThe estimate cannot be faithful because faithful representation requires perfect accuracy
  3. CThe estimate is faithful only if the actual result later equals it exactly
  4. DEstimates are excluded from financial reports because they fail neutrality

Explanation

Free from error does not mean perfectly accurate. Where estimates are used, a faithful representation requires the estimate to be clearly described as such, with its nature and limitations explained and no errors in selecting and applying the process. Requiring an exact later outcome or banning estimates is incorrect.

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