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

A finance director proposes to create a general provision of $50,000 for unspecified future losses, so that profit is lower this year and higher next year. Which is the best reason this should NOT be recognised?

The provision should not be recognised because it would deliberately overstate liabilities to smooth profits, breaching neutrality and faithful representation, and because no present obligation exists, so the liability definition is not met. Provisions are allowed only when recognition criteria are satisfied.

  1. AIt would bias the information, breaching neutrality, and there is no present obligation meeting the liability definitionCorrect
  2. BIt would breach the cost constraint
  3. CIt would be too costly to calculate
  4. DProvisions are never permitted under IFRS

Explanation

Deliberately overstating liabilities to smooth profit is not prudence; it makes information biased and not faithfully representative. Also, there is no present obligation from a past event, so no liability exists. Option D is wrong because provisions are allowed where recognition criteria are met.

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