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ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting

A manager argues that a large loss should be left out of the draft financial statements because the amount cannot be known with complete certainty. Which feature of faithful representation most directly contradicts this argument?

Free from error does not mean perfect accuracy. Under faithful representation, a reasonable, clearly described estimate of the loss is acceptable, so uncertainty about the exact amount is no justification for omitting a material loss from the financial statements.

  1. AFree from error does not mean perfectly accurate, so reasonable estimates can be usedCorrect
  2. BInformation must be presented in the shortest possible time
  3. CInformation must be capable of being independently verified to the exact cent
  4. DInformation must show only items that favour the entity

Explanation

Faithful representation requires information to be free from error, but this does not mean perfectly accurate. Estimates are acceptable if the amount is clearly described as an estimate and the process is sound. Omitting a material loss would also breach neutrality and completeness.

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