The AASB Accounting Conceptual Framework provides six qualitative characteristics, including two fundamental and four enhancing qualities. Utilising AASB Conceptual Framework and relevant evidence, compare and contrast ‘relevance’ and ‘faithful representation’ qualities. Discuss whether there is a trade- off between the two or they can be considered equally important.
In an article that appeared in The Australian on 28 July 2014 entitled ‘Southern Cross CFO quit over write-down’ (by Darren Davidson) it was reported that: Mr Lewis joined Southern Cross after it issued a profit downgrade in May. The owner of the 2DayFM radio network said that it expected full-year net profit to fall 10 per cent below the previous year’s underlying NPAT of $89 million. Although the company’s gearing remains within its banking covenant of less than 3.5 times earnings before interest, taxes, depreciation and amortisation, there is concern in the market the company is slipping into a danger zone with its debt covenants. Some market analysts believe that if revenues continue to deteriorate, gearing of above three times EB!TDA could trigger a breach of banking covenants.
Critically analyse the above scenario using Positive Accounting Theory.