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

Karta Co's finance director deliberately overstates a provision by a material amount in a profitable year, to create a reserve to release in a poorer year and smooth profits. Which statement best describes the effect on the fundamental qualitative characteristics?

Faithful representation is breached because the deliberately overstated provision is biased and misstates the liability. Neutrality requires information without slant, and the Framework does not regard deliberate overstatement of liabilities as prudence. Completeness alone cannot rescue information that is not neutral or free from error.

  1. ARelevance is breached because the information is not timely
  2. BFaithful representation is breached because the information is not neutral and not free from errorCorrect
  3. CBoth fundamental characteristics are met because the amount is prudent
  4. DFaithful representation is met because the provision is complete

Explanation

Deliberately overstating a provision is intended to influence users' perception and so is biased. This breaches neutrality and misstates the liability, so it is not a faithful representation. The Framework does not treat deliberate understatement or overstatement as prudence, and completeness alone does not make it faithful.

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