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Faithful representation is a fundamental characteristic of useful information within the
International Accounting Standards Board’s Conceptual Framework for financial reporting.
Which of the following treatments applies the principle of faithful representation?A Reporting a transaction based on its legal status rather than its economic substance.
B Excluding a subsidiary from consolidation because its activities are not compatible
with those of the rest of the group.
C Recording the whole of the net proceeds from the issue of a loan note which is
potentially convertible to equity shares as a liability.
D Allocating part of the sales proceeds of a motor vehicle to interest received even
though it was sold with interest-free finance.The correct answer is D.
Query: I don’t understand why B and C are incorrect. Could you help me understand? Also how is D correct?
D is correct as we have sold a motor vehicle with interest free credit, when essentially there is no such thing as an interest free loan. We therefore faithfully represent the transaction by splitting the proceeds into revenue from the sale of goods (motor vehicle) and interest received.
B is not correct as we cannot just exclude a subsidiary because it is involved in different activities to the rest of the group. A group of companies will have a diversified portfolio in its operation and so the group accounts will be faithfully represented by showing all group members in the consolidated accounts.
C is not correct as we faithfully represent the transaction through split accounting, not by recognising all the proceeds as a liability.
Hope that clears it up for you.
Thanks.
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