In the IASB standard-setting conceptual framework, the word "reliability" has been replaced with "faithful representation." This has caused much discussion among preparers of financial information. This change has led to other implications related to substance over form, neutrality, conservatism, and the ability of entities to "override" a standard in very rare circumstances.
Discuss the following questions. (You may find the IASB's Basis for Conclusions to the Exposure Draft: Conceptual
Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of
Decision-Useful Financial Reporting Information, of May 29, 2008, helpful in your discussion. It is available on the IASB website at: www.ifrs.org.)
(a) "Faithful representation" has replaced the term "reliability" as a fundamental qualitative characteristic of financial information. 'Wbat does faithful representation mean and how does this differ from reliability? 'Why was the term "reliability'' replaced?
(b) 'What does "substance over form" mean? Give examples of where this might be relevant.
(c) How does "conservatism" conflict with the meaning of "faithful representation"?
(d) In IAS 1, a company is allowed, in rare circumstances, to override an accounting standard if applying the standard would not result in a "true and fair view." How does this support faithful representation? Are there any enhancing characteristics that might be violated by this? If you were a financial statement user of a company that had decided to use this override, what information would you like to have disclosed in the financial statements? 'Why?