Conceptual Framework Faithful Representation

Conceptual Framework Faithful Representation

This post is part of all posts relating to the discussion regarding the Conceptual Framework for Financial Reporting issued in 2010. Use the link if you want to read the narrative from its start.

Conceptual Framework Faithful Representation

Financial reports represent information about the reporting entity’s economic resources, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims in words and numbers.

A perfect faithful representation would be complete, neutral and free from error. The question is if perfection is achievable and off course perfection comes at a cost.

How to challenge the completeness of a faithful representation?

A faithful representation will at least include:

  • a reporting line description explaining the nature of the financial statement item (account name),
  • an amount connected to this description, and
  • a further description of what the amount stands for (for example original cost, adjusted cost or fair value).

The first two lines can be disclosed in the face of one of the statements part of the financial statements, the last description will mostly be included in the notes to the financial statements. However, it is also possible that the face of a statement in the financial statements shows an aggregation of a few account lines, which are further detailed in the notes to the financial statements, the IFRS standards are flexible in this respect..

Sometimes, explicit explanation is needed of significant facts about the quality and nature of items, factors and circumstances that possibly affect the quality and nature and the method/model used to calculate the amount presented.

How to challenge the neutrality of a faithfull representation?

Neutral stands for several sorts of synonyms, the Conceptual Framework mentions some. A description should be neutral, that is without bias in the selection or presentation of financial information. One could also say the description has to be objective i.e. in selecting or presenting financial information a preparer should consider to make use of ‘standardised’ descriptions also for example with reference to industry specific wordings.

An other way of looking at neutrality could be indifference. But neutrality in disclosing financial information does not imply indifference, on the contrary, a neutral faithful representation is meaningful to a user, it can change an user’s opinion and as a result change an economic decision by such an user.

In the old Framework for the Preparation and Presentation of Financial Statements another qualification of a presentation not being neutral is mentioned that also clearly paints the picture. Financial statements are not neutral if, by selection or presentation of information, they influence the making of a decision or judgement in order to achieve a predetermined result or outcome.

Than we have ‘free from error’. Again this not an absolute saying, free from error means the presentation of financial information should be fit for the purpose.

Look at the difference between market value and fair value. Market value of a listed share is easy to observe, there is a stock exchange with regular trading and as at 31 December of a year there is a price.

Fair value of a piece of real estate is not as easy to esthablish. Can you use the recent sale of a property next to yours to value your property? Probably not!

You hire a specialized real estate agent, with a proven track record in calculating/estimating fair values of the specific type of real estate the reporting entity owns. The agent reports its findings and calculation method to the reporting entity and the reporting entity explains this in the notes to the accounts. Not free of error but the representation of fair value with its detailed dsiclosures established like this is in general judged by users as being a faithful presentation.

Continue reading comparability

Conceptual Framework Faithful Representation

Conceptual Framework Faithful Representation

Conceptual Framework Faithful Representation

Conceptual Framework Faithful Representation

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