The following are all qualitative characteristics of financial statements. Show
UnderstandabilityThe information must be readily understandable to users of the financial statements. This means that information must be clearly presented, with additional information supplied in the supporting footnotes as needed to assist in clarification. RelevanceThe information must be relevant to the needs of the users, which is the case when the information influences their economic decisions. This may involve reporting particularly relevant information, or information whose omission or misstatement could influence the economic decisions of users. ReliabilityThe information must be free of material error and bias, and not misleading. Thus, the information should faithfully represent transactions and other events, reflect the underlying substance of events, and prudently represent estimates and uncertainties through proper disclosure. ComparabilityThe information must be comparable to the financial information presented for other accounting periods, so that users can identify trends in the performance and financial position of the reporting entity. Qualitative characteristics are the attributes that make financial information useful to users. The qualitative characteristics of financial information can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. Fundamental Qualitative Characteristics of Financial Information1. RelevanceRelevant financial reporting information means the ability of users (shareholder) to make a difference in their decision. Information regarding to economic phenomenon will help the users make a difference decision if it included predictive value and confirmatory value.
2. Faithful RepresentationUseful financial information needs not only be a relevant but also be a faithful representation. Financial reporting information included the characteristics of complete, neutral, and free from material error is supposed to be faithful representation of an economic phenomenon. A single description in financial reports may correspond to multiple economic phenomena. For instance, the plant and equipment presents in the balance sheet may stand for all the plant and equipment that owned by entity.
Relevance is the fundamental qualitative characteristics of financial information which connected to the economic phenomena and must be considered first before the other qualitative characteristics. Once the relevance is applied to distinguish which economic phenomena should be presented, faithful representation is going to determine which characteristics are best to correspond to the relevant phenomena. Therefore, relevance and faithful representation must work in a line to provide useful financial information to the users. Enhancing Qualitative Characteristics of Financial InformationEnhancing qualitative characteristics of financial information are additional benefit added to the fundamental to enhance the decision usefulness of financial information.
Enhancing qualitative characteristics of financial information provide additional benefit and usefulness in the financial reporting information. Therefore, the four important characteristics which are comparability, verifiability, timeliness and understandability should be extent widely. However, the enhancing qualitative characteristics will be useless if the financial information is irrelevant or not faithfully represented in fundamental step. The application of the enhancing qualitative characteristics is redundant process that does not follow priority and prescribed order. Sometimes, one or some of the enhancing qualitative characteristics will be given up to maximize the usefulness of another qualitative characteristic. If such situation happened, appropriate information or evidence should be disclosed. Related Posts:
When accounting information is complete neutral and free from error it has?Faithful representation means that information is complete, neutral, and free from bias. The quality of financial statements is enhanced by comparability, verifiability, timeliness, and understandability.
What makes financial information neutral?Neutrality & Faithful Presentation
The next accounting concept is neutrality, which means that financial statements must be free from errors or from other missions. Financial statements cannot be prepared with the purpose to influence certain decisions, i.e. they might be neutral.
What is a neutral financial statement?Neutrality requires that management prepare completely unbiased financial statements. For example, a company with information about a probable lawsuit must report it on their financial statement notes. Withholding this information would make the financial statements unreliable to outside investors and creditors.
What is predictive and confirmatory value?Predictive value helps users in predicting or anticipating future outcomes. Confirmatory value enables users to check and confirm earlier predictions or evaluations.
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