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a company’s profit and loss statement showed an operation loss in its operations but the company is aware that the increase in the value of their properties during the period far outweighs the operating loss.
Q:how wd u treat this item in the FS and indicate on which of the conceptual framework’s qualitative characteristics your treatment is based.
i chose faithful representation but the answer says relevance. the answer simply states ” this is an issue of relevance ..” and then goes on to explain the accounting treatment – which i wrote too but…..
my argument: in substance, the gain in property does not reflect the way the business is being carried out, rather this gain is a result of economic conditions in general. also, the gain is unrealized, and thus should go under OCI. if the gain was clumped with the loss and the net figure shown as one, it will not faithfully represent the weaknesses of the business activities during the year.
how do i differentiate correctly between Relevance and faithful rep?
Tricky (again!)
As you read the various points in the suggested solution, ask yourself whether each separate point could be classified as “relevant”
“the gain in property does not reflect the way the business is being carried out” so the gain is irrelevant
“rather this gain is a result of economic conditions in general” so it’s irrelevant in the context of reporting operating performance
“the gain is unrealized, and thus should go under OCI” so it’s irrelevant in the context of reporting operating performance
I can sympathise with your thinking along “faithful presentation” lines 🙁
Here’s an extract from the IASPLUS website: (I don’t know if it helps!)
“Fundamental qualitative characteristics
Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information.
Relevance
Relevant financial information is capable of making a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. The predictive value and confirmatory value of financial information are interrelated.
Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity’s financial report.
Faithful representation
General purpose financial reports represent economic phenomena in words and numbers, To be useful, financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent. This fundamental characteristic seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error. Information must be both relevant and faithfully represented if it is to be useful.”
thanks…..!!!
my line of thinking was: what wd the owners have done in the ABSENCE of any IFRSs …
but i get it now……
thank u again!
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