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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

At the year end Delta Co holds a legal claim against a customer. A lawyer says it is probable but not certain that Delta will win $90,000. Delta's accountant proposes to recognise the $90,000 as income now, citing the need to show a good result. Which qualitative characteristic or concept does this mainly breach?

This mainly breaches neutrality. Booking an uncertain gain purely to present a better result biases the information towards optimism, whereas faithful representation requires neutral, unbiased information, exercised with caution when uncertainty exists.

  1. AComparability, because other entities do not do this
  2. BNeutrality, because it supports a desired outcome by being biased towards optimismCorrect
  3. CTimeliness, because the information is delayed
  4. DUnderstandability, because the claim is complex

Explanation

Recognising uncertain income to flatter results introduces bias. Neutrality, supported by prudence as caution under uncertainty, requires information free from bias. The issue is not delay, complexity or cross-entity comparison.

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