FR – March 2024 – L2 – Q5c – Financial Reporting Standards and Their Applications

Identify the qualities required in information when management uses judgment in developing accounting policies under IAS 8.

Question

According to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, when an IFRS specifically applies to a transaction, other event, or condition, the accounting policy applied to that item shall be determined by applying the IFRS. In the absence of an IFRS that specifically applies to a transaction, other event, or condition, management shall use its judgment in developing and applying an accounting policy that results in information that has certain qualities.

Required:
Identify the qualities that must be present in the resultant information when management of an entity uses its judgment in developing and applying an accounting policy.
(5 marks)

Answer

When management uses judgment in developing and applying an accounting policy in the absence of a specific IFRS, the resultant information must have the following qualities:

Relevance:
The information should be relevant to users’ decision-making needs. This means that the accounting policies chosen must provide financial information that influences economic decisions and reflects the entity’s financial performance and position accurately.
Faithful Representation:
The information must faithfully represent the entity’s financial position, performance, and cash flows. It should capture the economic substance of transactions and not just their legal form, ensuring the financial information is complete, neutral, and free from bias.
Neutrality:
The financial information must be neutral, meaning it should not be manipulated to achieve a predetermined outcome. Accounting policies should be applied objectively without favoring one outcome over another.
Prudence:
The financial information must be prepared with caution, ensuring that assets and income are not overstated, and liabilities and expenses are not understated. Prudence ensures that uncertainties are appropriately accounted for.
Completeness:
The information provided must be complete in all material respects. This means all necessary information required to understand the entity’s financial position, performance, and cash flows should be included.

(Marks evenly spread = 5 marks)

Tags: Accounting estimates, Accounting Policies, IAS 8, Judgement in Financial Reporting, Qualities of Information
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAR 2024

Uploader: Dotse