Question

"faithful respresentation" is the overriding principle that should be followed in ones prepaparation of IFRS-based financial statement.

what is it? explain it fully quoting IAS. how this this principle apply in recognition of a liability?

Answer 1

IAS 1 - Presentation of Financial Statements

It is an International Financial Reporting Standard adopted by IASB and lays down the rules and requirements for presentation of IFRS-based financial statements. It has set certain requirements of financial statements and some of them are:

• Fair presentation
• Accrual basis of accounting
• Annual prepration
• Comparative statements
• Consistency in presentation

It is overriding principle since it acts to correct the facts presented in financial statements.

The financial statements must present fairly the financial position of an entity. Fair presentation requires the faithful representation of the transactions and assets, liabilities, income and expenses in the Framework. The application of IFRSs and additional disclosure results in financial statements toi achieve fair and faithful presentation.

Faithful Representation represents reliability. It is the qualitative representation of financial statements. It says that all material facts should be disclosed in financial statements and no hidden facts should be there. All assets, liabilities and capital should be disclosed in the financial statements as they actually are. The values should tally the actual amounts and not manipulated or edited.

Recognition -

The recognition of assets and liabilities is subject to the criteria of faithful representation. A liability is an obligation of the enterprise. A liability must be present and arise from past events, Outflows must be probable. Cost or value should be measurable. The liabilities should meet the recognition criteria of liabilities in conceptual framework of IFRS.

Liabilites should be recognised as they are and the above conditions should be met for faithful representation of the liabilites in the balance sheet. If the creteria is met but recognition is not done, then they should be represented as contingent liabilites.