CA Final

Paper 1

Financial
Reporting
Chapter-wise compilation
of RTP, MTP and PYP

11
Modified as per
new scheme

Applicable for
May'24 & Nov’24
Attempts
Compilation
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 Frequently Asked Questions
1. Why RTP’s, MTP’s and PYP’s?
RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language.
These questions train you to understand what is important and what is expected of you.
At least 41% of questions* are asked from previous RTP’s, MTP’s and PYP’s.

2. What is included?
In this compiler, all questions from the last 3, 5 or 11 attempts depending on the one you have
selected will be available. There will be references to the marks and the attempt from which
they were asked. Identical or similar questions have been removed and references for both
attempts are mentioned.

3. What is the benefit of Chapter-wise?

We have categorized each and every question from all Old RTPs, MTP’s, and PYP’s into
chapters. This means that you don't have to wait until you've completed your entire syllabus
to tackle an RTP, MTP, or past paper. You can start solving these questions to check your
conceptual clarity right after finishing a particular chapter.

4. What does amended for the latest attempt mean?

When we reviewed all the questions from the past 11 attempts of RTP, MTP, and PYP’S, we
didn't just segregate them Chapterwise; we also updated them to reflect the latest provisions.
All the answers provided in the compilation are applicable for the May 2024 examination. So,
there's no need to stress about outdated or incorrect information.

5. How are Old RTP’s, MTP’s & PYP’s beneficial for me?
All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI.
This means that if a specific chapter from the old scheme is not included in the new scheme,
it has been omitted. If a particular chapter in the new scheme is based on concepts from two
or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme. If a chapter is only partially included in the new scheme, the questions
related to those specific concepts are only included in the corresponding chapter of the new
scheme. A comprehensive reconciliation of the chapters between the new scheme and the old
scheme is provided on the following page.

6. What if a new attempt is added post my purchase?

If you have purchased materials for the May 2024 attempt, you will receive a file with the
questions segregated Chapterwise specifically for that attempt.

7. What does N/A mean?

It could mean any of the following:
1. No questions from that chapter have been included in the selected attempts.
2. The chapter is newly introduced, and as a result, no questions have been previously asked
in RTP’s, MTP’s, or PYP’s.

*This is on an average based on the last 11 attempts

 Financial Reporting
Reconciliation of chapters of the new scheme (May’24) with old course
Sr. No Particulars Comparison
with chapters
of Old Scheme
1 Introduction to Indian Accounting Standards Same
2 Conceptual Framework for Financial Reporting under Indian Same
Accounting Standards (Ind AS)
3 Ind AS on Presentation of Items in the Financial Statements Same
3.1 Ind AS 1 “Presentation of Financial Statements” Same
3.2 Ind AS 34 “Interim Financial Reporting” Same
3.3 Ind AS 7 “Statement of Cash Flows” Same
4 Ind AS on Measurement based on Accounting Policies Same
4.1 Ind AS 8 “Accounting Policies, Changes in Accounting Estimates Same
and Errors”
4.2 Ind AS 10 “Events after the Reporting Period” Same
4.3 Ind AS 113 “Fair Value Measurement” Same
5 Ind AS 115 “Revenue from Contracts with Customers” Same
6 Ind AS on Assets of the Financial Statements Same
6.1 Ind AS 2 “Inventories” Same
6.2 Ind AS 16 “Property, Plant and Equipment” Same
6.3 Ind AS 23 “Borrowing Costs” Same
6.4 Ind AS 36 “Impairment of Assets” Same
6.5 Ind AS 38 “Intangible Assets” Same
6.6 Ind AS 40 “Investment Property” Same
6.7 Ind AS 105 “Non-current Assets Held for Sale and Discontinued Same
Operations”
6.8 Ind AS 116 “Leases” Same
7 Other Indian Accounting Standards Same
7.1 Ind AS 41 “Agriculture” Same
7.2 Ind AS 20 “Accounting for Government Grants and Disclosure of Same
Government Assistance”
7.3 Ind AS 102 “Share Based Payment” Same
8 Ind AS on Liabilities of the Financial Statements Same
8.1 Ind AS 19 “Employee Benefits” Same
8.2 Ind AS 37 “Provisions, Contingent Liabilities and Contingent Same
Assets”
9 Ind AS on Items impacting the Financial Statements Same
9.1 Ind AS 12 “Income Taxes” Same
9.2 Ind AS 21 “The Effects of Changes in Foreign Exchange Rates” Same
10 Ind AS on Disclosures in the Financial Statements Same
10.1 Ind AS 24 “Related Party Disclosures” Same
10.2 Ind AS 33 “Earnings per Share” Same
10.3 Ind AS 108 “Operating Segments” Same
11 Accounting and Reporting of Financial Instruments Same
12 Ind AS 103 “Business Combinations” Same
13 Consolidated and Separate Financial Statements of Group Same
Entities
14 Ind AS 101 “First-time Adoption of Indian Accounting Same
Standards”
15 Analysis of Financial Statements Same
16 Professional and Ethical Duty of a Chartered Accountant Newly Add
17 Accounting and Technology Newly Add
Table of Contents
Sr. Particulars Page Number
No
1 Introduction to Indian Accounting Standards 1.1 – 1.2
2 Conceptual Framework for Financial Reporting under 2.1 -2.5
Indian Accounting Standards (Ind AS)
3 Ind AS on Presentation of Items in the Financial
Statements
3.1 Ind AS 1 “Presentation of Financial Statements” 3.1-1 – 3.1-11
3.2 Ind AS 34 “Interim Financial Reporting” 3.2-1 – 3.2-8
3.3 Ind AS 7 “Statement of Cash Flows” 3.3-1 – 3.3-15
4 Ind AS on Measurement based on Accounting Policies
4.1 Ind AS 8 “Accounting Policies, Changes in Accounting 4.1-1 – 4.1-14
Estimates and Errors”
4.2 Ind AS 10 “Events after the Reporting Period” 4.2-1 – 4.2-7
4.3 Ind AS 113 “Fair Value Measurement” 4.3-1 – 4.3-8
5 Ind AS 115 “Revenue from Contracts with Customers” 5.1 – 5.42
6 Ind AS on Assets of the Financial Statements
6.1 Ind AS 2 “Inventories” 6.1-1 – 6.1-12
6.2 Ind AS 16 “Property, Plant and Equipment” 6.2-1 – 6.2-22
6.3 Ind AS 23 “Borrowing Costs” 6.3-1 – 6.3-10
6.4 Ind AS 36 “Impairment of Assets” 6.4-1 – 6.4-15
6.5 Ind AS 38 “Intangible Assets” 6.5-1 – 6.5-12
6.6 Ind AS 40 “Investment Property” 6.6-1 – 6.6-6
6.7 Ind AS 105 “Non-current Assets Held for Sale and 6.7-1 – 6.7-13
Discontinued Operations”
6.8 Ind AS 116 “Leases” 6.8-1 – 6.8-26
7 Other Indian Accounting Standards
7.1 Ind AS 41 “Agriculture” 7.1-1 – 7.1-10
7.2 Ind AS 20 “Accounting for Government Grants and 7.2-1 – 7.2-13
Disclosure of Government Assistance”
7.3 Ind AS 102 “Share Based Payment” 7.3-1 – 7.3-22
8 Ind AS on Liabilities of the Financial Statements
8.1 Ind AS 19 “Employee Benefits” 8.1-1 – 8.1-14
8.2 Ind AS 37 “Provisions, Contingent Liabilities and 8.2-1 – 8.2-7
Contingent Assets”
9 Ind AS on Items impacting the Financial Statements
9.1 Ind AS 12 “Income Taxes” 9.1-1 – 9.1-15
9.2 Ind AS 21 “The Effects of Changes in Foreign Exchange 9.2-1 – 9.2-13
Rates”
10 Ind AS on Disclosures in the Financial Statements
10.1 Ind AS 24 “Related Party Disclosures” 10.1-1 – 10.1-6
10.2 Ind AS 33 “Earnings per Share” 10.2-1 – 10.2-15
10.3 Ind AS 108 “Operating Segments” 10.3-1 – 10.3-10
11 Accounting and Reporting of Financial Instruments 11.1 – 11.56
12 Ind AS 103 “Business Combinations” 12.1 – 12.50
13 Consolidated and Separate Financial Statements of 13.1 – 13.57
Group Entities
14 Ind AS 101 “First-time Adoption of Indian Accounting 14.1 – 14.17
Standards”
15 Analysis of Financial Statements 15.1 – 15.28
16 Professional and Ethical Duty of a Chartered 16.1 -16.3
Accountant
17 Accounting and Technology 17.1
18 Case Scenarios 18.1 – 18.11

MTPs: March’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21,
Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23,Sep ’23
,Oct ’23,March’24 & April ‘24
PYPs: May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22,
May’23, Nov’23
RTPs: May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22,
May ’23, Nov ’23, May’24
 1.1

Chapter 1
Introduction to Indian Accounting Standards
Question 1
Fresh Vegetables Limited (FVL) was incorporated on 2 nd April, 20X1 under the provisions of the
Companies Act, 2013 to carry on the wholesale trading business in vegetables. As per the audited
accounts of the financial year ended 31 st March, 20X7 approved in its annual general meeting held on
31st August, 20X7 its net worth, for the first time since incorporation, exceeded ₹ 250 crore. The
financial statements since inception till financial year ended 31st March, 20X6 were prepared in
accordance with the Companies (Accounting Standards) Rules 2006. It has been advised that
henceforth it should prepare its financial statements in accordance with the Companies (Indian
Accounting Standards) Rules, 2015.
The following additional information is provided by the Company:
 FVL has in the financial year 20X2-20X3 entered into a 60:40 partnership with Logistics
Limited and incorporated a partnership firm 'Vegetable Logistics Associates' (VLA) to carry
on the logistics business of vegetables from farm to market.
 FVL also has an associate company Social Welfare Limited (SWL) that was incorporated in
July, 20X5 as a charitable organization and registered under section 8 of the Companies Act,
2013. Social Welfare Limited has been the associate company of FVL since its incorporation.
Examine the applicability of Ind AS on VLA & SWL. (RTP May ’22)
Answer 1
Applicability of Ind AS in general:
 Currently Ind AS is applicable to the following companies except for companies other than banks and
Insurance Companies, on mandatory basis:
(a) All companies which are listed or in process of listing in or outside India on Stock Exchanges.
(b) Unlisted companies having net worth of ₹ 250 crore or more but less than ₹ 500 crore.
(c) Holding, Subsidiary, Associate and Joint venture of above.
 Companies listed on SME exchange are not required to apply Ind AS on mandatory basis.
 Once a company starts following Ind AS either voluntarily or mandatorily on the basis of criteria
specified, it shall be required to follow Ind AS for all the subsequent financial statements even if any
of the criteria specified does not subsequently apply to it.
 Application of Ind AS is for both standalone as well as consolidated financial statements if threshold
criteria met or adopted voluntarily.
 Companies meeting the thresholds for the first time at the end of an accounting year shall apply Ind
AS from the immediate next accounting year with comparatives.
 Companies not covered by the above roadmap shall continue to apply existing Accounting Standards
notified in the Companies (Accounting Standards) Rules, 2006.
Since the net worth of FVL in immediately preceding year exceeded ₹ 250 crore, Ind AS is applicable
to it. The entity VLA and SWL have to be examined as they may fall in criteria (c) above.
Applicability of Ind AS on VLA
Joint arrangement can be either joint operation or joint venture. However, for the purpose of identifying
the applicability of Ind AS, the Act defines Joint venture (as an explanation to section 2(6) of the Companies
Act, 2013), as follows:
“The expression "joint venture" means a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement”.
Accordingly, if an entity is classified as joint operation and not joint venture, then Ind AS would not be
applicable to such entity.
In the case of VLA, if partners conclude that they have rights in the assets and obligations for the liabilities
relating to the partnership firm then this would be a joint operation. However, Ind AS would not be
applicable on VLA in such a case since it is the case of joint operation (and not a joint venture).
Alternatively, if partners conclude that they have joint control of the arrangement and have rights to the
net assets of the arrangement relating to the partnership firm, then this would be a joint venture. In such
a case, Ind AS would be applicable to them.
Applicability of Ind AS on SWL
Social Welfare Limited (SWL) is the associate company of FVL. Accordingly, Ind AS would be applicable on
SWL too irrespective of the fact that SWL has been incorporated as a charitable organization.

Chapter 1 Introduction to Indian Accounting Standards

 1.2

Question 2
Which entities are required to prepare their financial statements mandatorily on the basis of Indian
Accounting Standards (Ind AS)?
(Chapter 5: Ind AS 115 “Revenue from Contracts with Customers”) (4 Marks) (MTP 4 Marks
March’24)
Answer 2
Following entities are mandatorily required to prepare their financial statements based on Indian
Accounting Standards
• All Listed Corporate Entities
• Unlisted Corporate Entities having net worth of rupees five hundred crore or more
• All holding, subsidiary, joint venture or associate companies of the above mentioned listed and
unlisted corporate entities
• All NBFCs
• MF schemes

Chapter 1 Introduction to Indian Accounting Standards

 2.1

Chapter 2
Conceptual Framework for Financial Reporting under Indian Accounting
Standards (Ind AS)
Question 1
What is Equity, Income and Expenses as per ‘Framework for Financial Reporting under Ind AS’? How the
information with respect to income and expenses helps the users in understanding of the financial
statements? (MTP 5 Marks , Oct’22)
Answer 1
Equity: Equity claims are claims on the residual interest in the assets of the entity after deducting all its
liabilities. In other words, they are claims against the entity that do not meet the definition of liability.
Income and Expenses: Income is increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity claims.
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity claims.
Income and expenses are the elements of financial statements that relate to an entity’s financial
performance. Users of financial statements need information about both an entity’s financial position and
its financial performance. Hence, although income and expenses are defined in terms of changes in assets
and liabilities, information about income and expenses is just as important as information about assets
and liabilities.
Different transactions and other events generate income and expenses with different characteristics.
Providing information separately about income and expenses with different characteristics can help users
of financial statements to understand the entity’s financial performance.

Question 2
Defense Innovators Limited is a public sector undertaking and is engaged in the construction of warships
and submarines. XYZ Private Limited approached Defense Innovators Limited for construction of
"specially designed" ships for it, which will be used by XYZ Private Limited for transportation of specific
goods. The offer was accepted by the Defense Innovators Limited and both the companies entered into
an agreement for the construction and delivery of 3 specially designed ships on 'Fixed Price' basis with
variable component in respect to certain items.
Base and depot (B & D) spares for all three ships shall be procured by Defense Innovators Limited and
will be paid on the cost of the item with certain percentage.
The contract states that "certain equipment" out of variable cost items, will be supplied by XYZ Private
Limited at 'free of cost' for installation on board of ship. It is, therefore, to be noted as under:
(i) Some equipment is procured by Defense Innovators Limited in the presence of the XYZ Private
Limited's representative for technical scrutiny as well as negotiating the prices. The vendors of
these equipment are paid by Defense Innovators Limited. The cost of the equipment along with the
cost of installation and profit thereon is claimed and reimbursed by XYZ Private Limited to Defense
Innovators Limited.
(ii) There is certain other equipment for which orders are directly placed and also paid by the XYZ
Private Limited. This equipment is known as 'Buyer Furnished Equipment (BFE)' and are delivered
to the company 'free of cost' for installing in the ship. The labour cost of Installation of these are
already included in the price component of the contract. BFEs are returned to the buyer after
completion of the ship. The period required for construction of one ship was approximately four
years. Whether the cost of Buyer Furnished Equipment's (BFE's) supplied by XYZ Private Limited to
Defense Innovators Limited for-installing the same in the ships can be considered as 'inventory' by
Defense Innovators Limited and then on delivery of ship will be recognized as revenue in its books
of account? Elaborate. (MTP 6 Marks March ’23 & RTP May ‘22 )

Answer 2
Before any item can be recognized as an inventory, it should meet the definition of ‘asset’ as given in the
Conceptual Framework for Financial Reporting under Ind AS, issued by the Institute of Chartered
Accountants of India as follows:
“An asset is a present economic resource controlled by the entity as a result of past events and economic
resource is a right that has the potential to produce economic benefits”.
Chapter 2 Framework for Preparation and Presentation of Financial Statements
 2.2

The orders in respect of Buyer Furnished Equipment’s (BFEs) are directly placed by the buyer and payment
in respect of them is made by the buyer. These are then supplied to the company for installing in the ship
and the buyer pays installation charges which are included in the contract price. Thus, the company has
neither incurred any cost on BFEs nor any amount is recoverable on account of such equipment except
installation charges. Accordingly, such equipment are not ‘assets’ that may be considered as a part of its
contract work-in progress.
In fact, after installation in the ship, BFEs are returned to the buyer after completion of the ship. Thus,
these are only held by the company in the capacity of a bailee. Since, it cannot be considered as an ‘asset’,
therefore, it can neither be considered as ‘inventory’ nor as ‘work -in- progress’.
Further, it can also not be considered as a part of sale value or revenue of the company as no consideration
would be receivable with respect to the cost of such equipment.
On the basis of the above, it can be concluded that:
(i) The BFEs cannot be considered as inventories / Work- in- progress for Defense Innovators Limited.
(ii) The BFE’s cost cannot be considered as part of sales value / contract revenue to Defense Innovators
Limited.

Question 3
Mr. Unique commenced business on 1/04/17 with Rs. 20,000 represented by 5,000 units of the product
@ Rs. 4 per unit. During the year 2017-18, he sold 5,000 units @ Rs. 5 per unit. During 2017-18, he
withdraw Rs. 4.000.
 31/03/18: Price of the product @ Rs. 4.60 per unit
 Average price indices: 1/4/17: 100 & 31/3/18: 120
Find out:
(i) Financial capital maintenance at Historical Cost
(ii) Financial capital maintenance at Current Purchasing Power
(iii) Physical Capital Maintenance (PYP 5 Marks May’19)
Answer 3
Financial Capital Maintenance at historical costs
Rs. Rs.
Closing capital (Rs. 25,000 – Rs. 4,000) 21,000
Less: Capital to be maintained
Opening capital (At historical cost) -
Introduction (At historical cost) 20,000 (20,000)
Retained profit 1,000
Financial Capital Maintenance at current purchasing power
Rs. Rs.
Closing capital (Rs. 25,000 – Rs. 4,000) 21,000
Less: Capital to be maintained
Opening capital (At closing price) (5,000 x Rs. 4.80) 24,000
Introduction (At closing price) Nil (24,000)
Retained profit (3,000)
Physical Capital Maintenance
Rs. Rs.
Closing capital (Rs. 25,000 – Rs. 4,000) 21,000
Less: Capital to be maintained
Opening capital (At current cost) (5,000 x Rs. 4.60) 23,000
Introduction (At current cost) Nil (23,000)
Retained profit (2,000)

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

Most of the examinees had not attempted this part of the question. Those who had attempted
were also not able to either complete it or do it correctly.

Chapter 2 Framework for Preparation and Presentation of Financial Statements

 2.3

Question 4
Discuss the following in the context of 'Conceptual Framework for Financial Reporting under Indian Accounting
Standards':
(i) The cost constraint on useful financial information
(ii) Executory contracts. (PYP 5 Marks ,May ’22) (PYP 6 Marks Nov’23)

Answer 4
(i) The cost constraint on useful financial information;
Role of Cost: Cost is a pervasive constraint on the information that can be provided by financial
reporting. Reporting financial information imposes costs, and it is important that these costs are
justified by the benefits of reporting that information.
Basis of Assessment of Cost: Both the providers and users of financial information incur costs in
reporting and analyzing financial information. In applying the cost constraint, ICAI assesses
whether the benefits of reporting particular information are likely to justify the costs incurred to
provide and use that information. When applying the cost constraint in formulating a proposed
Ind AS, the ICAI seeks information from providers of financial information, users, auditors,
academics and others about the expected nature and quantity of the benefits and costs of that
Ind AS. In most situations, assessments are based on a combination of quantitative and
qualitative information.
Cost Perspective: Due to the inherent subjectivity, assessments of different individuals about the
costs and benefits of reporting particular items of financial information will vary. Therefore, ICAI
seeks to consider costs and benefits in relation to financial reporting generally, and not just in
relation to individual reporting entities.
(ii) Executory Contracts:
Definition: An executory contract is a contract, or a portion of a contract, that is equally unperformed
— neither party has fulfilled any of its obligations, or both parties have partially fulfilled their
obligations to an equal extent.
Outcome of Executory Contract: An executory contract establishes a combined right and
obligation to exchange economic resources. The rights and obligations are inter-dependent and
cannot be separated. Hence, the combined rights and obligations constitute a single asset or
liability.
The entity has an asset if the terms of the exchange are currently favourable; it has a liability if
the terms of the exchange are currently unfavourable.
Basis of Disclosure: Whether such an asset or liability is included in the financial statements
depends on both the recognition criteria and the measurement basis selected for the asset or
liability, including, if applicable, any test for whether the contract is onerous.

Question 5 (Also includes concepts of Chp 7.6- Ind AS 38 Intangible Assets)

Explain the criteria in the Conceptual Framework for Financial Reporting for the recognition of an asset
and discuss whether there are inconsistencies with the criteria in Ind AS 38. (PYP 6 Marks Nov 22 & Old
& New SM)
Answer 5
The Conceptual Framework defines an asset as a present economic resource controlled by the entity as a
result of past events. An economic resource is a right that has the potential to produce economic benefits.
Assets should be recognized if they meet the Conceptual Framework definition of an asset and such
recognition provides users of financial statements with information that is useful i.e. it is relevant as well
as results in faithful representation. However, the criteria of a cost-benefit analysis always exists i.e. the
benefits of the information must be sufficient to justify the costs of providing such information. The
recognition criteria outlined in the Conceptual Framework allows for flexibility in the application in
amending or developing the standards.
Para 8 of Ind AS 38 ‘Intangible Assets’, defines an intangible asset as an identifiable non-monetary asset
without physical substance. Further, Ind AS 38 defines an asset as a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.
Furthermore, Para 21 of Ind AS 38 states that an intangible asset shall be recognized if, and only if:
(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to

Chapter 2 Framework for Preparation and Presentation of Financial Statements

 2.4

the entity; and

(b) the cost of the asset can be measured reliably.
This requirement is applicable both in case of an externally acquired intangible asset or an internally
generated intangible asset. The probability of expected future economic benefits must be based on
reasonable and supportable assumptions that represent management’s best estimate of the set of
economic conditions that will exist over the useful life of the asset. Further, as per Para 33 of Ind AS 38,
the probability recognition criterion is always considered to be satisfied for intangible assets acquired in
business combinations. If the recognition criteria are not satisfied, Ind AS 38 requires the expenditure to
be expensed as and when it is incurred.
It is notable that the Conceptual Framework does not prescribe a ‘probability criterion’. As long as there
is a potential to produce economic benefits, even with a low probability, an item can be recognized as an
asset according to the Conceptual Framework. However, in terms of intangible assets, it could be argued
that recognizing an intangible asset having low probability of generating economic benefits would not be
useful to the users of financial statements given that the asset has no physical substance.
The recognition criteria and definition of an asset under Ind AS 38 are different as compared to those
outlined in the Conceptual Framework. To put in simple words, the criteria in Ind AS 38 are more specific,
but definitely do provide information that is relevant and a faithful representation. When viewed from the
prism of relevance and faithful representation, the requirements of Ind AS 38 in terms of recognition
appear to be consistent with the Conceptual Framework.

Question 6
Discuss with respect to 'Conceptual Framework for Financial Reporting under Indian Accounting
Standards', 'faithful representation', one of the qualitative characteristics of financial information.
(6 Marks May ‘23)

Answer 6
EITHER
Faithful representation
To be useful, financial information must 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.
To be a perfectly faithful representation, a depiction would have following three characteristics:
 Complete: A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
 Neutral: A neutral depiction is without bias in the selection or presentation of financial information.
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. Equally, the exercise of prudence
does not allow for the understatement of assets or income or the overstatement of liabilities or
expenses.
 Free from error: 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, being 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.

Question 7
Discuss the characteristics of good financial statements .
(PYP 6 Marks Nov’23)
Answer 7
Characteristics of good financial information are:

Chapter 2 Framework for Preparation and Presentation of Financial Statements

 2.5

1. Relevance
“Relevant financial information”
 Is financial information with (a) predictive value or (b) confirmatory value or both
 Makes it capable of making a difference in decisions made by users
 Makes it relevant financial information
Financial information has predictive value if it can be used as an input to processes employed by users
to predict future outcomes. Financial information need not be a prediction or forecast to have
predictive value. Financial information with predictive value is employed by users in making their own
predictions.
Financial information has confirmatory value if it provides feedback about (confirms or changes)
previous evaluations.
The characteristic of ‘relevance’ also includes the concept of materiality. Information is material if
omitting, misstating or obscuring it could reasonably be expected to influence decisions that the
primary users of general-purpose financial reports make on the basis of those reports, which provide
financial information about a specific reporting entity.
2. Faithful Representation
To be useful, financial information 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.
To be a perfectly faithful representation, a depiction would have following three characteristics:
 Complete: A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
 Neutral: A neutral depiction is without bias in the selection or presentation of financial information.
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.
 Free from error: 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.

Chapter 2 Framework for Preparation and Presentation of Financial Statements