What is meant by relevance and faithful
1 Faithful representation requires that transactions and events should be accounted for in a manner
that represent their true economic substance rather than the mere legal form.
2 Information presented in the financial statements should faithfully represent the transaction and
events that occur during a period.
3 A machine is leased to Company A for the entire duration of its useful life. Although Company A is
not the legal owner of the machine, it may be recognized as an asset in its balance sheet since the
Company has control over the economic benefits that would be derived from the use of the asset.
This is an application of the accountancy concept of substance over legal form, where economic
substance of a transaction takes precedence over its legal aspects.
4 Substance over form requires that if substance of transaction differs from its legal form than such
transaction should be accounted for in accordance with its substance and economic reality
5 The rationale behind this is that financial information contained in the financial statements should
represent the business essence of transactions and events not merely their legal aspects in order to
present a true and fair view
6 The requirement is for consistency between claims made in financial statements and economic
reports and the actual financial state of the company. Accounting reports should reflect the
accurate, reliable and verifiable financial position including debt, cash flow and company