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ACCA FA practice questions

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Question 1The context and purpose of financial reporting

What is the objective of general purpose financial reporting according to the IASB Conceptual Framework?

  1. To provide information about the entity that is useful to investors, lenders and other creditors Correct answer.
  2. To supply tax authorities with the figures they need to assess the entity's tax liability
  3. To enable management to prepare detailed budgets and to control the day-to-day operating costs of the business
  4. To show shareholders the maximum dividend that could lawfully be paid out of retained earnings

Explanation

The Conceptual Framework states that the objective is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Management is also interested in the information, but it is not the primary audience.

Question 2The context and purpose of financial reporting

According to the Conceptual Framework, which group is a primary user of general purpose financial statements?

  1. Customers and suppliers of the reporting entity
  2. Employees of the reporting entity
  3. Government departments and industry regulators
  4. Lenders and other creditors Correct answer.

Explanation

The primary users are existing and potential investors, lenders and other creditors, because they cannot require the entity to report information directly to them and must rely on general purpose financial statements. Other groups are interested parties but are not identified as primary users.

Question 3The context and purpose of financial reporting

Which body is responsible for issuing IFRS Accounting Standards?

  1. The IFRS Foundation
  2. The IFRS Interpretations Committee
  3. The International Auditing and Assurance Standards Board
  4. The International Accounting Standards Board Correct answer.

Explanation

The International Accounting Standards Board develops and issues IFRS Accounting Standards. The IFRS Foundation provides governance and oversight, the Interpretations Committee issues interpretations of existing requirements, and audit standards are set by a separate board.

Question 4The context and purpose of financial reporting

An entity prepares its financial statements on a going concern basis. What does this assumption mean?

  1. The entity's assets are carried at the amounts they would fetch on a forced liquidation
  2. The entity's future profits are guaranteed at current levels
  3. The entity will continue in operation for the foreseeable future Correct answer.
  4. The entity has sufficient cash to pay all of its debts immediately

Explanation

Going concern means the entity is viewed as continuing in operation for the foreseeable future, with no intention or necessity to liquidate or curtail significantly the scale of its operations. This justifies carrying assets at amounts recoverable through continued use rather than at break-up values.

Question 5The context and purpose of financial reporting

Under the accrual basis of accounting, when are transactions recognised?

  1. When the board of directors formally approves the transaction at a meeting
  2. When the bank statement confirms that the related payment has cleared
  3. Only when cash has been received from customers or paid to suppliers during the period
  4. When the economic event occurs, regardless of when cash moves Correct answer.

Explanation

The accrual basis recognises items as assets, liabilities, equity, income and expenses when they satisfy the definitions in the Conceptual Framework, which is when the underlying economic event occurs rather than when cash is received or paid.

Question 6The context and purpose of financial reporting

Information in financial statements is described as a faithful representation when it is:

  1. Complete, neutral and free from material error Correct answer.
  2. Comparable between different reporting entities
  3. Supported by an original source document such as an invoice
  4. Relevant and timely

Explanation

Faithful representation means that information depicts the economic substance of what it purports to represent and is complete, neutral and free from error in all material respects. Relevance is the other fundamental characteristic, while comparability, timeliness, verifiability and understandability are enhancing characteristics.

Question 7The context and purpose of financial reporting

A sole trader pays his personal household bills from the business bank account. Which concept requires these payments to be excluded from the business's financial statements?

  1. Business entity Correct answer.
  2. Going concern
  3. Accruals
  4. Substance over form

Explanation

The business entity concept treats the business as separate from its owner, so owner's private transactions are not recorded as business income or expenses. For a sole trader this separation is for accounting purposes only, since the owner and the business are not separate in law.

Question 8The context and purpose of financial reporting

Which financial statement reports an entity's assets, liabilities and equity at a specific date?

  1. The statement of financial position Correct answer.
  2. The statement of cash flows
  3. The statement of profit or loss
  4. The statement of changes in shareholders' equity

Explanation

The statement of financial position presents assets, liabilities and equity as at the end of the reporting period, so it is a position statement at a point in time. The other statements report movements or performance over a period.

Question 9The context and purpose of financial reporting

The Conceptual Framework explains that financial reporting also supports stewardship. What does stewardship mean in this context?

  1. The external auditor's responsibility for detecting fraud within the entity
  2. The directors' duty to maximise the market value of the entity's shares
  3. The shareholders' right to appoint and remove the entity's external auditors
  4. Management's accountability for the economic resources entrusted to it Correct answer.

Explanation

Stewardship refers to how efficiently and effectively management has discharged its responsibility to use the entity's economic resources, which helps users assess management's accountability. It is one aspect of the decision-usefulness objective rather than a separate objective.

Question 10The context and purpose of financial reporting

Which of the following is an enhancing qualitative characteristic rather than a fundamental one?

  1. Relevance
  2. Timeliness Correct answer.
  3. Materiality
  4. Faithful representation

Explanation

The enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability; they increase the usefulness of information that is already relevant and faithfully representative. Relevance and faithful representation are the two fundamental characteristics.

Question 11The context and purpose of financial reporting

Which statement best describes materiality?

  1. The requirement that every individual item above a fixed monetary threshold must be disclosed separately
  2. A concept that applies only to the notes and not to the primary financial statements
  3. Information is material if omitting or misstating it could influence users' decisions Correct answer.
  4. A fixed percentage of revenue prescribed by the IASB and applied by all reporting entities

Explanation

Materiality is entity-specific: information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users make on the basis of the financial statements. It applies to the whole set of financial statements, including recognition and measurement as well as disclosure.

Question 12The context and purpose of financial reporting

Under the Conceptual Framework, a liability is:

  1. A present obligation to transfer an economic resource as a result of past events Correct answer.
  2. An amount that the entity expects to pay at some future date under a planned purchase
  3. A resource currently controlled by the entity as a result of past events and expected to generate benefits
  4. A decrease in economic benefits recognised in the statement of profit or loss

Explanation

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The obligation must already exist at the reporting date and cannot depend solely on the entity's future actions.

Question 13The context and purpose of financial reporting

Under the Conceptual Framework, recognition of an asset or liability is appropriate when:

  1. The item has been included in the entity's accounting records for at least one full period
  2. The item can be measured at fair value in the statement of financial position at each year end
  3. The item has been reviewed and formally approved for recognition by the entity's external auditor
  4. The item meets the definition of an element and recognition provides useful information Correct answer.

Explanation

Recognition is appropriate if it provides users with useful information, meaning a relevant and faithful representation of the item and of any resulting income, expense or equity changes; the cost of providing the information is also considered. An item must first meet the definition of an element before recognition can be considered.

Question 14The context and purpose of financial reporting

Why is a regulatory framework for financial reporting needed?

  1. It guarantees that the financial statements are completely free from fraud and error
  2. It improves comparability and credibility and reduces information asymmetry Correct answer.
  3. It ensures that every entity reports exactly the same profit figure for a given period
  4. It removes the need for users to read the notes accompanying the financial statements

Explanation

A regulatory framework of consistent standards improves comparability between entities and periods and gives users confidence in the information, reducing the information gap between management and external users. It also imposes discipline on preparers and supports the credibility of capital markets.

Question 15The context and purpose of financial reporting

In developing a new IFRS Standard, which document does the IASB normally publish to invite public comment on its proposals?

  1. An exposure draft Correct answer.
  2. An agenda decision
  3. A management commentary
  4. A basis for conclusions

Explanation

The IASB's due process normally includes publishing a discussion paper and then an exposure draft of the proposed standard, inviting comments from interested parties before finalising the requirement. The basis for conclusions is published with the final standard to explain the board's reasoning.

Question 16The context and purpose of financial reporting

Which concept requires an entity to apply the same accounting policies and methods from one period to the next?

  1. Going concern
  2. Substance over form
  3. Prudence
  4. Consistency Correct answer.

Explanation

Consistency means that the same accounting policies and methods are applied from period to period, so that users can compare successive financial statements. A change is permitted only where it is required by a standard or results in more relevant information, and it must be disclosed.

Question 17The context and purpose of financial reporting

The Conceptual Framework identifies two broad measurement bases. Which pair are they?

  1. Historical cost and residual value
  2. Historical cost and current value Correct answer.
  3. Nominal value and present value
  4. Fair value and going concern

Explanation

The Conceptual Framework identifies historical cost and current value as the two broad measurement bases. Current value itself includes fair value, value in use or fulfilment value, and current cost.

Question 18The context and purpose of financial reporting

What is the role of the IFRS Interpretations Committee?

  1. It issues interpretations of how IFRS requirements apply to specific transactions Correct answer.
  2. It approves, ratifies and publishes every new IFRS Standard before it is issued
  3. It sets the international standards on auditing that are applied by audit firms around the world
  4. It provides guidance to entities on how to compute their income tax liabilities

Explanation

The IFRS Interpretations Committee reviews accounting issues that arise in practice and issues interpretations (and agenda decisions) on how IFRS requirements apply, so that the standards are applied consistently. It reports to the IASB and does not write the standards themselves.

Question 19The context and purpose of financial reporting

IFRS for SMEs is designed for entities that:

  1. All listed entities that prepare consolidated financial statements for stock exchange purposes
  2. Public sector entities such as government departments, local authorities and state hospitals
  3. Large multinational groups that operate in more than one national jurisdiction
  4. Entities without public accountability that publish general purpose financial statements Correct answer.

Explanation

IFRS for SMEs is a self-contained, simplified set of requirements intended for entities that do not have public accountability and that publish general purpose financial statements for external users. It reduces the recognition, measurement and disclosure burden compared with full IFRS.

Question 20The context and purpose of financial reporting

Which statement correctly distinguishes financial accounting from management accounting?

  1. Financial accounting is optional for all entities, while management accounting is required by IFRS
  2. Financial accounting records only cash transactions, while management accounting records all accruals
  3. Financial accounting is prepared only annually, while management accounting is prepared only when the entity is audited
  4. Financial accounting serves external users and follows standards; management accounting serves internal decision-making Correct answer.

Explanation

Financial accounting produces general purpose reports for external users in accordance with a regulatory framework, whereas management accounting produces whatever information internal managers need, in any format and at any frequency, without external regulation.

Question 21The context and purpose of financial reporting

How does the 2018 Conceptual Framework treat prudence?

  1. As the exercise of caution in judgements under uncertainty, which supports neutrality Correct answer.
  2. As a concept that was removed entirely from the Conceptual Framework and no longer applies to any entity
  3. As a requirement deliberately to understate assets and overstate liabilities in order to be conservative
  4. As a separate fundamental qualitative characteristic that takes priority over faithful representation

Explanation

The 2018 Conceptual Framework describes prudence as the exercise of caution when making judgements under conditions of uncertainty, and explains that it supports neutrality rather than conflicting with it. Prudence is not a separate qualitative characteristic, and it does not permit deliberate understatement or overstatement.

Question 22The context and purpose of financial reporting

IAS 1 requires an entity to depart from a requirement of an IFRS in the extremely rare circumstances when:

  1. compliance would be so misleading that it would conflict with the objective of financial statements Correct answer.
  2. the entity's external auditor has confirmed in writing that the requirement is not relevant to the entity's industry
  3. the directors consider that compliance would reduce the reported profit for the financial year
  4. the requirement has been applied by fewer than half of the entities operating in the same industry sector

Explanation

IAS 1 permits departure from a requirement only in extremely rare cases where compliance would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework. The entity must disclose the nature of the departure, the reason for it and its financial effect.

Question 23The context and purpose of financial reporting

Managers usually know more about an entity's prospects than its shareholders do. What is the main consequence of this for financial reporting?

  1. It means that shareholders can rely on the share price as a complete summary of all relevant information
  2. It removes the need for audited financial statements in large listed companies
  3. It creates an information gap that regulation and general purpose financial statements seek to reduce Correct answer.
  4. It guarantees that managers will always act in the best financial interests of the shareholders

Explanation

This imbalance is known as information asymmetry and is a principal reason why financial reporting is regulated and audited: mandatory disclosure and independent assurance reduce the gap between management and external users and support accountability. It also helps to mitigate moral hazard and adverse selection problems.

Question 24The context and purpose of financial reporting

Under the physical capital maintenance concept, an entity earns a profit when:

  1. Its physical productive capacity at the year end exceeds that at the start of the year Correct answer.
  2. Its historical cost net assets increase after adding back depreciation
  3. Its cash balances increase over the accounting period
  4. Its net assets at the end of the year exceed the total amount invested by the owners during the year

Explanation

Under physical capital maintenance, capital is measured as the entity's productive capacity, and profit is earned only after that capacity has been maintained. Financial capital maintenance instead measures profit as the excess of the money amount of net assets over the opening amount, after adjusting for owner contributions and distributions.

Question 25The context and purpose of financial reporting

Which of the following is a current value measurement basis identified in the Conceptual Framework?

  1. Original transaction price less any directly attributable transaction costs
  2. Value in use for assets and fulfilment value for liabilities Correct answer.
  3. The lower of cost and net realisable value at the reporting date
  4. Historic cost adjusted for accumulated depreciation and impairment

Explanation

Current value includes fair value, value in use for assets and fulfilment value for liabilities, and current cost. All of these reflect conditions at the measurement date, unlike historical cost, which reflects the price of the original transaction.

Question 26The context and purpose of financial reporting

A bank is deciding whether to lend to a listed company and relies on the company's general purpose financial reports. Under the Conceptual Framework, why is the bank regarded as a primary user of those reports?

  1. Because it provides capital to the entity only in the form of equity
  2. Because its decisions directly determine the entity's operating and financing policies
  3. Because it cannot require the entity to provide information directly and so must rely on the general purpose reports Correct answer.
  4. Because it has the authority to require the entity to prepare information tailored to its needs

Explanation

The Conceptual Framework identifies existing and potential investors, lenders and other creditors as the primary users of general purpose financial reports. Their defining feature is that they cannot demand information directly from the entity, so they depend on the reports to make resource allocation decisions such as lending.

Question 27Qualitative characteristics of financial information

Which pair of characteristics are the two fundamental qualitative characteristics of useful financial information?

  1. Timeliness and verifiability
  2. Prudence and going concern
  3. Relevance and faithful representation Correct answer.
  4. Comparability, verifiability and timeliness

Explanation

Useful financial information must be relevant and must faithfully represent what it purports to represent; these two are the fundamentals from which all other qualities follow. The remaining characteristics enhance information that is already relevant and faithfully represented.

Question 28Qualitative characteristics of financial information

Which of the following is an enhancing qualitative characteristic of financial information?

  1. Relevance
  2. Completeness
  3. Verifiability Correct answer.
  4. Neutrality

Explanation

The enhancing characteristics are comparability, verifiability, timeliness and understandability; they increase the usefulness of information that is already relevant and faithfully represented. Neutrality and completeness are components of faithful representation, and relevance is a fundamental characteristic.

Question 29Qualitative characteristics of financial information

Financial information is relevant when it has which quality?

  1. It is available to users before the information loses its influence.
  2. It can be compared with similar information about other entities.
  3. It is free from material error and bias.
  4. It can make a difference to the decisions of users. Correct answer.

Explanation

Relevance means the information is capable of making a difference in the decisions users make, whether through predictive value, confirmatory value or both. Freedom from error, comparability and timeliness are separate qualities.

Question 30Qualitative characteristics of financial information

Which set of qualities must information possess to be faithfully represented?

  1. Complete, neutral and free from error Correct answer.
  2. Comparable, verifiable and understandable
  3. Relevant, material and prudent
  4. Consistent, complete and timely

Explanation

A faithful representation depicts the substance of an economic phenomenon completely, neutrally and without error in its description and measurement. Comparability, verifiability, understandability and timeliness are enhancing qualities that sit outside faithful representation.

Question 31Qualitative characteristics of financial information

Understandability of financial statements assumes that users have which attribute?

  1. A right to demand extra explanations from the entity
  2. A reasonable knowledge of business and economic activity Correct answer.
  3. Professional investor status with expert advisers
  4. Detailed knowledge of accounting standards

Explanation

Information is understandable when it is classified, characterised and presented clearly for users who have a reasonable knowledge of business and economic activity and who review the information with reasonable diligence. Preparers may not omit complex information simply on the grounds that it is difficult.

Question 32Qualitative characteristics of financial information

Information has the quality of timeliness when which of the following applies?

  1. It can be agreed by independent observers.
  2. It is free from bias and material error.
  3. It is available in time to influence decisions. Correct answer.
  4. It is presented consistently each year.

Explanation

Timeliness means having information available to decision makers before it loses its capacity to influence their decisions. Information that arrives too late cannot affect choices already made.

Question 33Qualitative characteristics of financial information

Prudence is best described as which of the following?

  1. Exercising caution when making judgements under uncertainty Correct answer.
  2. Recording assets at the lowest possible amount in every period
  3. Applying the same accounting policy in every reporting period
  4. Recognising losses only once a transaction has occurred

Explanation

Prudence is the exercise of caution when judgements are made under conditions of uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated. It supports neutrality and does not permit deliberate understatement of assets or overstatement of liabilities.

Question 34Qualitative characteristics of financial information

Recording a transaction according to its economic reality rather than its legal form is an application of which concept?

  1. Transactions are recorded according to their economic reality. Correct answer.
  2. Transactions are disclosed only when they are material.
  3. Transactions are recorded when cash is received or paid.
  4. Transactions are recorded using consistent accounting policies.

Explanation

Faithful representation requires accounting for the substance of a transaction rather than merely its legal form. If the two differ, the economic substance determines how the transaction is reported.

Question 35Qualitative characteristics of financial information

How does the Conceptual Framework treat materiality?

  1. Materiality is assessed only for the statements as a whole.
  2. An item is material only if it exceeds 10% of total assets.
  3. Materiality is fixed for each industry by the framework.
  4. Judgement is required; no single threshold applies. Correct answer.

Explanation

Materiality is an entity-specific aspect of relevance and depends on the nature or magnitude of the item judged in the context of the entity's own financial statements. No universal quantitative threshold is prescribed, and judgement must be applied.

Question 36Qualitative characteristics of financial information

For a faithful representation, complete financial information includes which of the following?

  1. only favourable information about the entity
  2. all information needed for a user to understand it Correct answer.
  3. every transaction recorded in the accounting system
  4. only the amounts required by national law

Explanation

Completeness requires all information necessary for a user to understand the phenomenon being depicted, including narrative explanations and disclosures as well as amounts. Omission can make information false or misleading.

Question 37Qualitative characteristics of financial information

Which statement about the quality described as 'free from error' is correct?

  1. It means no errors or omissions in the description and measurement. Correct answer.
  2. It is achieved only when the auditor issues a clean opinion.
  3. It requires all amounts to be exact to the nearest currency unit.
  4. It means the statements contain no estimates or judgements.

Explanation

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 without error. Estimates are permissible provided their nature and limitations are clearly described.

Question 38Qualitative characteristics of financial information

Neutrality in financial reporting means which of the following?

  1. The entity avoids disclosing information that is unfavourable.
  2. Information is free from bias in selection or presentation. Correct answer.
  3. The entity reports equal amounts of good and bad news.
  4. The entity applies the same policies as its competitors.

Explanation

Neutrality means that information is not slanted, weighted, emphasised or otherwise manipulated to increase the probability that it will be received favourably or unfavourably. Prudence supports neutrality by countering the natural optimism of preparers.

Question 39Qualitative characteristics of financial information

Information possesses verifiability when which of the following occurs?

  1. The amount has been reviewed by the audit committee.
  2. Independent observers could reach a consensus on the amount. Correct answer.
  3. The amount has been confirmed by the entity's bank.
  4. The amount is supported by an original supplier invoice.

Explanation

Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a depiction is a faithful representation. It may be direct, by observation, or indirect, by checking inputs and recomputing outputs.

Question 40Qualitative characteristics of financial information

Comparability of financial information enables users to do which of the following?

  1. Entities use an identical format for the statements.
  2. Users can identify similarities and differences between items. Correct answer.
  3. Entities must not change accounting policies in any case.
  4. Entities must all use the same accounting policies.

Explanation

Comparability is the quality that enables users to identify and understand similarities in, and differences among, items, both between periods for one entity and between entities. It is not the same as uniformity, and policies may change if the change is disclosed and comparatives are restated where appropriate.

Question 41Qualitative characteristics of financial information

Information is not relevant to users' decisions. Can the enhancing characteristics make it useful?

  1. Yes, if it is provided on a timely basis.
  2. Yes, if it is presented comparably across periods.
  3. No, the fundamental characteristics must be present. Correct answer.
  4. Yes, but only when the amounts are verifiable.

Explanation

Enhancing characteristics improve the usefulness of information that is already relevant and faithfully represented, but they cannot compensate for the absence of either fundamental characteristic. Irrelevant information remains useless however timely or verifiable it is.

Question 42Qualitative characteristics of financial information

An entity must report a liability whose amount is uncertain and can only be estimated. How should it best satisfy the qualitative characteristics?

  1. Estimate it and disclose the estimation uncertainty. Correct answer.
  2. Recognise it only when the uncertainty is resolved.
  3. Omit it, because it cannot be measured exactly.
  4. Record the lowest possible amount to avoid overstatement.

Explanation

Where measurement is uncertain, an estimate based on reasonable assumptions accompanied by disclosure of the estimation uncertainty best balances relevance and faithful representation. Omitting the item or waiting for certainty would deprive users of relevant information.

Question 43Qualitative characteristics of financial information

An entity sells goods to a bank for cash and simultaneously agrees to buy them back at a fixed higher price in three months. How should the transaction be reported?

  1. Do not treat as a sale: it is a secured borrowing. Correct answer.
  2. Do not treat as a sale because the buyer cannot resell.
  3. Treat as a sale because legal title has passed.
  4. Treat as a sale because payment has been received.

Explanation

The entity retains the risks and rewards of the goods and must repurchase them at a fixed price, so in substance the arrangement is a loan secured on the goods. Faithful representation requires accounting for the economic substance rather than the legal form of a sale.

Question 44Qualitative characteristics of financial information

An entity changes its method of depreciating plant and restates the previous year's figures on the new basis. Which qualitative characteristic is most directly enhanced?

  1. Timeliness
  2. Prudence
  3. Neutrality
  4. Comparability Correct answer.

Explanation

Restating comparatives places the current and prior periods on the same basis so that users can identify genuine similarities and differences between them. This directly enhances comparability, which consistency underpins.

Question 45Qualitative characteristics of financial information

An entity publishes its annual financial statements 30 months after the reporting date. Which characteristic is most directly impaired?

  1. Comparability
  2. Completeness
  3. Verifiability
  4. Timeliness Correct answer.

Explanation

Information must be available to decision makers before it loses its capacity to influence their decisions. A delay of two and a half years means the figures are likely to be superseded by other sources, so timeliness is impaired.

Question 46Qualitative characteristics of financial information

An auditor recalculates a depreciation charge from the asset register, checking the cost, useful life and residual value used. Which qualitative characteristic does this process demonstrate?

  1. Understandability
  2. Prudence
  3. Verifiability Correct answer.
  4. Relevance

Explanation

Recalculating an amount from its inputs is indirect verification, because different knowledgeable and independent observers could reach consensus that the depiction is faithful. Verifiability may be direct, by observation, or indirect, by checking inputs and recomputing outputs.

Question 47Qualitative characteristics of financial information

Which statement best reflects the Conceptual Framework's approach to materiality?

  1. Materiality is fixed for each industry by the framework.
  2. An item is material only if it exceeds 10% of total assets.
  3. Judgement is required; no single threshold applies. Correct answer.
  4. Materiality is assessed only for the statements as a whole.

Explanation

Materiality is an entity-specific aspect of relevance, judged by whether omitting or misstating an item could influence users' decisions given the nature or magnitude involved. No universal percentage is prescribed, and assessment may take place at the level of the statements as a whole or of particular items.

Question 48Qualitative characteristics of financial information

To create a hidden reserve, a company deliberately values closing inventory below the lower of cost and net realisable value. How should this practice be described?

  1. It complies with relevance by improving predictions.
  2. It complies with prudence because it is cautious.
  3. It breaches comparability because inventory varies.
  4. It breaches neutrality, which prudence must not distort. Correct answer.

Explanation

Prudence supports neutrality by requiring caution under uncertainty; it does not permit deliberate understatement of assets or deliberate overstatement of liabilities. Creating hidden reserves introduces bias and therefore breaches neutrality and faithful representation.

Question 49Qualitative characteristics of financial information

Which statement about predictive value and confirmatory value is correct?

  1. Predictive value means forecasting the share price.
  2. Information with only confirmatory value cannot be relevant.
  3. Information may have one or both and still be relevant. Correct answer.
  4. Information must have both to be relevant.

Explanation

Information is relevant if it has predictive value, confirmatory value or both, and the two are interrelated because information used to predict outcomes also confirms or corrects earlier expectations. Neither is a prerequisite for the other.

Question 50Qualitative characteristics of financial information

An obligation can be measured only within a wide range of possible amounts and none of the outcomes can be identified as more likely. How should the preparer proceed?

  1. exclude it from the statements until measurement is certain
  2. recognise an estimate and disclose the uncertainty Correct answer.
  3. recognise the most favourable amount within the range
  4. recognise the amount that minimises reported profit

Explanation

Where measurement is subject to significant uncertainty, an estimate based on reasonable assumptions should be recognised and the nature and extent of the uncertainty disclosed. Selecting a deliberately favourable or unfavourable amount would breach neutrality, and omission would breach completeness.