Faithful representation means the financial statements accurately reflect financial transactions within the company. Most users do not have the time or expertise to evaluate the factual content of the information. Thus, financial statements must be faithfully representative.
Faithful representation is one of the two key qualitative aspects of useful financial statements. The other is relevance. Both are vital attributes that increase the reliability of data in the financial statements.
Relevance implies that data must have predictive and confirmatory value. It allows users to predict future performance and to evaluate past conditions of the company.
The elements of faithful representation
Three features of faithful representation are:
- Complete
- Neutral
- Free from error
Complete means the financial statements contain all data needed to understand business conditions. The company presents all items related to financial results and position as well as cash flow. It does not hide information that causes users to have different opinions about the business.
Neutral means information is free from any bias. So, it does not mislead users in making related decisions.
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Financial information is free from errors if it accurately describes economic events. There are no implementation errors or omissions in presenting it. Also, companies adhere to appropriate financial reporting standards in presenting information without error.
