AIAF 114 Chapter 1 - Section 1 (Questions + Answers) Solved

Five basic assertions of accounting - Answer-complete, valued correctly, exists, belongs to the company, and is properly classified, described, and disclosed Accounting information criteria - Answer-Understandability, Relevance, Reliability, Comparability and Consistency, Lack of Bias, and Cost-Benefit Effectiveness Understandability - Answer-Must be transparent, intelligible, and clearly disclosed Relevance - Answer-Must be timely, have predictive value, and provide useful feedback about previously made decisions Reliability - Answer-Should embody Representational Faithfulness, Verifiability, Completeness, and Neutrality Representational Faithfulness - Answer-The information represents what it claims to represent Verifiability - Answer-Another person or entity should be able to recreate the reported value using the same information as the reporting entity Completeness - Answer-The reported information should not omit any material fact or consideration Neutrality - Answer-The information can be used for economic decision making without regard to how it my affect economic, political, or social behavior Comparability and Consistency - Answer-Accounting information must allow for comparisons between time periods and among entities and therefore must be consistent Lack of Bias - Answer-Biased information can be misleading. When uncertainty is present, an accounting framework may require the reporting of unbiased values accompanied by sufficient disclosure of biased values with the bias determined in a predictable, consistent fashion.Actuarial Standards of Practice (ASOP) - Answer-Requires only that the actuary "be aware that a discounted reserve is an inadequate estimate of economic value unless appropriate risk margins are included The Standards of Practice of the Canadian Institute of Actuaries (CIA) - Answer-Require the reporting of policy liabilities that include both present value discounting and provisions for adverse deviation (risk margin) Cost-Benefit Effectiveness - Answer-The development of accounting information consumes resources. Consequently the cost of producing such information should be reasonable in relation to the expected benefit of the information Comparing Relevance and Reliability - Answer-In many cases, a trade-off exists between relevance and reliability. The relationship between relevance and reliability also affects the valuation of difficult-to-estimate insurance liabilities Comparing Lack of Bias and Reliability - Answer-A conflict can arise between lack of bias and reliability of information where uncertainty exists. Some accounting frameworks require conservatism or prudence in such circumstances. What constitutes conservatism depends on the context in which an estimate is made. Any bias in accounting information could produce misleading information unless the end user can quantify or adjust for the bias. In the face of uncertainty, accounting frameworks may call for reporting of unbiased estimates accompanied by disclosure of the uncertainty rather than reported biased estimates. Reliability - Answer-In many cases a trade-off exists between relevance and it is timely - Answer-A specific characteristic of Relevant account information Transparent - Answer-In general, to be understandable, information contained in financial reports must be intelligible, clearly disclosed and Lack of Bias - Answer-When uncertainty exists, a conflict can arise between reliability andNeutrality - Answer-Information that can be used for economic decision making without regard for how it may affect economic, political, or social behavior embodies the characteristic of reliability known as Consistent - Answer-Because accounting information must allow for comparisons between time periods and among entities, it must be, above all else