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ACCA Applied Skills · Financial Reporting · Limitations of financial statements

Which of the following is a limitation of financial statements arising from the use of judgement and estimates?

Financial statements depend on management estimates such as provisions and useful lives, which involve judgement and may be biased to smooth profits. This reduces reliability and comparability, unlike the incorrect claims that revenue equals cash received or that staff morale is reported.

  1. ARevenue is always equal to cash received in the period
  2. BProvisions and useful lives depend on management's estimates, which may be biased to smooth profitsCorrect
  3. CAll non-current assets are revalued every year under IFRS
  4. DFinancial statements include non-financial information such as staff morale

Explanation

Items such as provisions, impairment and useful lives require judgement and so can be manipulated (for example earnings smoothing). The other options are wrong: IFRS uses accruals, revaluation is optional and not annual by requirement, and morale is not recognised.

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