Conceptual Framework for Financial Reporting

Faithful representation
Financial reports represent economic phenomena in words and numbers. To
be useful, financial information must not only represent relevant phenomena,
but it must also faithfully represent the substance of the phenomena that it
purports to represent. In many circumstances, the substance of an economic
phenomenon and its legal form are the same. If they are not the same,
providing information only about the legal form would not faithfully
represent the economic phenomenon (see paragraphs 4.59–4.62).
To be a perfectly faithful representation, a depiction would have three
characteristics. It would be complete, neutral and free from error. Of course,
perfection is seldom, if ever, achievable. The Board’s objective is to maximise
those qualities to the extent possible.
A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary
descriptions and explanations. For example, a complete depiction of a group of
assets would include, at a minimum, a description of the nature of the assets
in the group, a numerical depiction of all of the assets in the group, and a
description of what the numerical depiction represents (for example,
historical cost or fair value). For some items, a complete depiction may also
entail explanations of significant facts about the quality and nature of the
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items, factors and circumstances that might affect their quality and nature,
and the process used to determine the numerical depiction.
A neutral depiction is without bias in the selection or presentation of financial
information. A neutral depiction is not slanted, weighted, emphasised,
de-emphasised or otherwise manipulated to increase the probability that
financial information will be received favourably or unfavourably by users.
Neutral information does not mean information with no purpose or no
influence on behaviour. On the contrary, relevant financial information is, by
definition, capable of making a difference in users’ decisions.
Neutrality is supported by the exercise of prudence. Prudence is the exercise
of caution when making judgements under conditions of uncertainty. The
exercise of prudence means that assets and income are not overstated and
liabilities and expenses are not understated.
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Equally, the exercise of prudence
does not allow for the understatement of assets or income or the
overstatement of liabilities or expenses. Such misstatements can lead to the
overstatement or understatement of income or expenses in future periods.
The exercise of prudence does not imply a need for asymmetry, for example, a
systematic need for more persuasive evidence to support the recognition of
assets or income than the recognition of liabilities or expenses. Such
asymmetry is not a qualitative characteristic of useful financial information.
Nevertheless, particular Standards may contain asymmetric requirements if
this is a consequence of decisions intended to select the most relevant
information that faithfully represents what it purports to represent.
Faithful representation does not mean accurate in all respects. Free from error
means there are no errors or omissions in the description of the phenomenon,
and the process used to produce the reported information has been selected
and applied with no errors in the process. In this context, free from error does
not mean perfectly accurate in all respects. For example, an estimate of an
unobservable price or value cannot be determined to be accurate or
inaccurate. However, a representation of that estimate can be faithful if the
amount is described clearly and accurately as being an estimate, the nature
and limitations of the estimating process are explained, and no errors have
been made in selecting and applying an appropriate process for developing the
estimate.
When monetary amounts in financial reports cannot be observed directly and
must instead be estimated, measurement uncertainty arises. 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 (see paragraph 2.22).
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Assets, liabilities, income and expenses are defined in Table 4.1. They are the elements of
financial statements.
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