ACCA Applied Knowledge · Financial Accounting · Qualitative characteristics of useful financial information
A company's financial statements omit a material lawsuit that management expects to lose, because management does not wish to alarm investors. Which fundamental qualitative characteristic is most directly breached, and why?
Faithful representation is breached. Leaving out a material lawsuit makes the information incomplete, and doing so to avoid alarming investors shows bias, so it is not neutral. A faithful representation must be complete, neutral and free from material error.
- AFaithful representation, because the information is incomplete and not neutralCorrect
- BRelevance, because the information is not timely
- CComparability, because other companies disclose lawsuits
- DUnderstandability, because the information is too complex
Explanation
A faithful representation must be complete, neutral and free from error. Omitting a material item to influence users' perception removes completeness and shows bias, so neutrality is lost. Timeliness and comparability are enhancing characteristics and are not the main failing here.
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