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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

The directors of a listed Indian company are concerned about a limitation of historical-cost based annual accounts when used by an investor to value the company. Which is the most valid limitation?

The key limitation is that accounts are mainly backward-looking and based on past transactions, so items like internally generated brands and future earning potential may not be reflected. Investors therefore need additional information, because accounts do not show market values, forecasts or full economic worth.

  1. AAccounts are largely backward-looking and may omit unrecognised value such as internally generated brands, so they may not reflect future earning potentialCorrect
  2. BAccounts must by law show all assets at current market value, which makes them volatile
  3. CAccounts exclude all information about liabilities
  4. DAccounts are prepared only for the tax authorities and not for investors
  5. Accounts always include forecast profits that cannot be verified

Explanation

Historical accounts report past transactions and generally do not recognise internally generated intangibles, so they are an incomplete guide to future value. The other options misstate the framework: not all assets are at market value, liabilities are reported, investors are key users and forecasts are not normally included.

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