Conceptual Framework for Financial Reporting

Faithful representation
Recognition of a particular asset or liability is appropriate if it provides not
only relevant information, but also a faithful representation of that asset or
liability and of any resulting income, expenses or changes in equity. Whether
a faithful representation can be provided may be affected by the level of
measurement uncertainty associated with the asset or liability or by other
factors.
Measurement uncertainty
For an asset or liability to be recognised, it must be measured. In many cases,
such measures must be estimated and are therefore subject to measurement
uncertainty. As noted in paragraph 2.19, the use of reasonable estimates is an
essential part of the preparation of financial information and does not
undermine the usefulness of the information if the estimates are clearly and
accurately described and explained. Even a high level of measurement
uncertainty does not necessarily prevent such an estimate from providing
useful information.
In some cases, the level of uncertainty involved in estimating a measure of an
asset or liability may be so high that it may be questionable whether the
estimate would provide a sufficiently faithful representation of that asset or
liability and of any resulting income, expenses or changes in equity. The level
of measurement uncertainty may be so high if, for example, the only way of
estimating that measure of the asset or liability is by using cash-flow-based
measurement techniques and, in addition, one or more of the following
circumstances exists:
(a)
the range of possible outcomes is exceptionally wide and the
probability of each outcome is exceptionally difficult to estimate.
(b)
the measure is exceptionally sensitive to small changes in estimates of
the probability of different outcomes—for example, if the probability
of future cash inflows or outflows occurring is exceptionally low, but
the magnitude of those cash inflows or outflows will be exceptionally
high if they occur.
(c)
measuring the asset or liability requires exceptionally difficult or
exceptionally subjective allocations of cash flows that do not relate
solely to the asset or liability being measured.
In some of the cases described in paragraph 5.20, the most useful information
may be the measure that relies on the highly uncertain estimate, accompanied
by a description of the estimate and an explanation of the uncertainties that
affect it. This is especially likely to be the case if that measure is the most
relevant measure of the asset or liability. In other cases, if that information
would not provide a sufficiently faithful representation of the asset or liability
and of any resulting income, expenses or changes in equity, the most useful
information may be a different measure (accompanied by any necessary
descriptions and explanations) that is slightly less relevant but is subject to
lower measurement uncertainty.
5.18
5.19
5.20
5.21
Conceptual Framework
A56
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In limited circumstances, all relevant measures of an asset or liability that are
available (or can be obtained) may be subject to such high measurement
uncertainty that none would provide useful information about the asset or
liability (and any resulting income, expenses or changes in equity), even if the
measure were accompanied by a description of the estimates made in
producing it and an explanation of the uncertainties that affect those
estimates. In those limited circumstances, the asset or liability would not be
recognised.
Whether or not an asset or liability is recognised, a faithful representation of
the asset or liability may need to include explanatory information about the
uncertainties associated with the asset or liability’s existence or measurement,
or with its outcome—the amount or timing of any inflow or outflow of
economic benefits that will ultimately result from it (see paragraphs
6.60–6.62).