Question

Question 1

As a professional accountant who is concerned about the qualitative characteristics of preparing financial statements.

(a) You are required to:

1. Explain five (5) qualitative characteristics of IFRS that is used to prepare financial statements to your colleagues at the meeting.                                                  
2. Explain the difference between profit and profitability.                                                             

Explain the concept of going concern and the implication of revocation of going concern assumption when financial statements are prepared.      

Answer 1

Qualitative Characteristics of IFRS

The Conceptual Framework for Financial Reporting defines the fundamental qualitative characteristics of financial information to be:

1) Relevance

To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.

2) Faithful representation

To be reliable, information must represent faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent. Thus, for example, a balance sheet should represent faithfully the transactions and other events that result in assets, liabilities and equity of the entity at the reporting date which meet the recognition criteria.

The Framework also describes enhancing qualitative characteristics:

1) Comparability

Users must be able to compare the financial statements of an entity through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different entities in order to evaluate their relative financial position, performance and changes in financial position.

2) Verifiability

The information should come from the reliable source. It should have a proper Verifiability.

3) Timeliness

If there is undue delay in the reporting of information it may lose its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information. To provide information on a timely basis it may often be necessary to report before all aspects of a transaction or other event are known, thus impairing reliability.

4) Understandability

An essential quality of the information provided in financial statements is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.

Difference between Profit and Profitability   

Profit	Profitability
Meaning
Profit is the net income made after covering expenses.	Profitability is the extent to which profit is made.
Interpretation
Profit is an absolute amount.	Profitability is expressed as a percentage.
Comparison
Profit cannot be successfully compared since it is not relative.	Profitability can be successfully compared through the use of ratios.

Going Concern

Going concern is one the fundamental assumptions in accounting on the basis of which financial statements are prepared. Financial statements are prepared assuming that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities. Therefore, it is assumed that the entity will realize its assets and settle its obligations in the normal course of the business.

This concept assumes that, when preparing a normal set of financial statements, the business will continue to operate in approximately the same manner for the foreseeable future (at least, but not limited to, the next 12 months). In particular the entity will not go into liquidation or cease trading, or have no realistic alternative but to liquidate or cease trading.

Implication of revocation of going concern assumption when financial statements are prepared   

Going concern is an important part of the generally accepted accounting principles. Without it, businesses would not be able to perform accrued or prepaid expenses. The going concern principle allows a business to defer some of their prepaid expenses to future accounting periods, rather than recognising them all at once.