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

Following the 2018 Conceptual Framework, how is prudence treated in relation to faithful representation?

Prudence is the exercise of caution when making judgements under uncertainty. It supports neutrality and faithful representation, but it does not permit deliberately understating assets or income or overstating liabilities or expenses, because that would introduce bias.

  1. APrudence is the exercise of caution under uncertainty and supports neutrality, so deliberate understatement of assets is not permittedCorrect
  2. BPrudence requires assets and income to be understated and liabilities and expenses overstated
  3. CPrudence is a separate fundamental qualitative characteristic alongside relevance
  4. DPrudence has been removed entirely and has no connection with the Framework

Explanation

The Framework describes prudence as caution when making judgements under uncertainty and says it supports neutrality. It does not allow deliberate understatement of assets or income, or overstatement of liabilities or expenses. It is not a separate characteristic, and it is not unconnected to the Framework.

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