Acca f3 Financial Accounting (int) Study Text

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3: Accounting conventions   Part B  The qualitative characteristics of financial information and the fundamental bases of accounting 

(a)

Accruals basis

Financial statements prepared under the accruals basis show users past transactions involving 

cash and also obligations to pay cash in the future and resources which represent cash to be 

received in the future. 

(b)

Going concern

It is assumed that the entity has no intention to liquidate or curtail major operations. If it did, then 

the financial statements would be prepared on a different (disclosed) basis. 

(c)

Business entity concept 

 Financial statements are prepared on the basis that the business is a separate entity from the 

owner(s) regardless of the legal position. 

3.5 Qualitative characteristics of financial statements 

The Framework states that qualitative characteristics are the attributes that make the information provided 

in financial statements useful to users. The four principal qualitative characteristics are 

understandability,

relevance, reliability and comparability. These and the other qualitative characteristics are discussed in 

detail in Sections 3.6 to 3.15 that follow. 

While the previous sections have been mainly background information, make sure that you learn Sections 

3.6 to 3.15 as these are specifically listed in the syllabus. At the 2009 ACCA Teachers' Conference, the 

examiner emphasised that students need to be aware of the theoretical aspects of the syllabus eg the 

Framework.

3.6 Understandability 

Users must be able to understand financial statements. They are assumed to have some business, 

economic and accounting knowledge and to be able to apply themselves to study the information 

property.

Complex matters should not be left out of financial statements simply due to its difficulty if it is 

relevant information. 

3.7 Relevance 

Only relevant information can be useful. Information is relevant when it helps users evaluate past, 

present or future events, or it confirms or corrects previous evaluations. The predictive and confirmatory 

roles of information are interrelated. 

Information on financial position and performance is often used to predict future position and 

performance and other things of interest to the user, eg likely dividend, wage rises. The 

manner of 

showing information will enhance the ability to make predictions, eg by highlighting unusual items. 

The relevance of information is affected by its nature and 

materiality. Information may be judged relevant 

simply because of its nature (eg remuneration of management). In other cases, both the nature and 

materiality of the information are important. Materiality is not a primary qualitative characteristic itself (like 

reliability or relevance), because it is merely a threshold or cut-off point. 

3.8 Reliability 

Information must also be 

reliable to be useful, ie free from material error and bias. The user must be 

able to depend on it being a faithful representation. 

Even if information is relevant, if it is very unreliable it may be misleading to recognise it, eg a disputed 

claim for damages in a legal action. 

Point to note 

Exam focus 

point

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Part B  The qualitative characteristics of financial information and the fundamental bases of accounting

  3:  Accounting conventions

39

3.9 Faithful representation 

Information must 

represent faithfully the transactions it purports to represent in order to be reliable. 

There is a risk that this may not be the case, not due to bias, but due to 

inherent difficulties in identifying 

the transactions or finding an appropriate method of measurement or presentation.

Where measurement of the financial effects of an item is so uncertain, enterprises should not recognise 

such an item, eg internally generated goodwill. 

3.10 Substance over form 

Faithful representation of a transaction is only possible if it is accounted for according to its 

substance

and economic reality, not with its legal form. 

3.11 Neutrality 

Information

must be free from bias to be reliable. Neutrality is lost if the financial statements are prepared 

so as to influence the user to make a judgement or decision in order to achieve a predetermined outcome. 

3.12 Prudence 

Uncertainties exist in the preparation of financial information, eg the collectability of doubtful receivables. 

These uncertainties are recognised through disclosure and through the application of prudence.

Prudence does not, however, allow the creation of hidden reserves or excessive provisions, 

understatement of assets or income or overstatement of liabilities or expenses. 

3.13 Completeness 

Financial information must be complete, within the restrictions of materiality and cost, to be reliable. 

Omission may cause information to be misleading. 

3.14 Comparability 

Users must be able to compare an entity's financial statements: 

(a)

through time to identify trends; and 

(b)

with other entity's statements, to evaluate their relative financial position, performance and 

changes in financial position. 

The consistency of treatment is therefore important across like items over time, within the entity

and across all entities. 

The

disclosure of accounting policies is particularly important here. Users must distinguish between 

different accounting policies to be able to make a valid comparison of similar items in the accounts of 

different entities. 

Comparability is 

not the same as uniformity. Entities should change accounting policies if they become 

inappropriate.

Corresponding information for 

preceding periods should be shown to enable comparison over time. 

3.15 Constraints on relevant and reliable information 

3.15.1 Timeliness 

Information may become irrelevant if there is a delay in reporting it. 

There is a balance between 

timeliness and the provision of reliable information. Information may be reported on a timely basis 

when not all aspects of the transaction are known, thus compromising reliability. 

Point to note 

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