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CF Qualitative Characteristics

The document discusses the qualitative characteristics of financial statements that make information useful to users. There are two fundamental qualitative characteristics: relevance and faithful representation. Relevance means the information can influence decisions and faithful representation means the information is reasonably free from error. Some enhancing characteristics are comparability, understandability, verifiability, and timeliness. The overriding goal of the qualitative characteristics is to provide decision-useful information to users of financial statements.

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951 views3 pages

CF Qualitative Characteristics

The document discusses the qualitative characteristics of financial statements that make information useful to users. There are two fundamental qualitative characteristics: relevance and faithful representation. Relevance means the information can influence decisions and faithful representation means the information is reasonably free from error. Some enhancing characteristics are comparability, understandability, verifiability, and timeliness. The overriding goal of the qualitative characteristics is to provide decision-useful information to users of financial statements.

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Conceptual Framework: Qualitative Characteristics

Qualitative Characteristics of financial statements


 Are the attributes that make the information provided in financial statements useful to users.
 Are considered either fundamental or enhancing.
 Relate to the content and substance of financial information
 Contribute to the decision-usefulness of financial reporting information.
 Distinguish better information from inferior information for decision-making purposes.

Fundamental qualitative characteristics are: Relevance and Faithful representation.

Relevance
 Capable of making difference in a decision
 Predictive value and confirmatory value
 Influences the economic decisions of users
 Enables users to better forecast future operations
 If there is undue delay in the reporting of information, the information may lose relevance.

Faithful Representation
 Gives assurance that it is reasonably free from (material) error and bias
 Completeness, neutrality and free from error

Substance over form- in the event of conflict between the economic between the economic substance of a
transaction and the legal form, the economic substance shall prevail.

Neutrality- the financial accounting information is directed toward the common needs of users and is
independent of presumptions about particular needs and desires of specific users.

Enhancing Characteristics of financial statements


 Comparability
 Understandability
 Verifiability
 Timeliness
 Users need reasonable knowledge of business and financial accounting matters to understand the
information contained in financial statements.

Comparability
 When information about two different entities engaged in the same industry has been prepared and
presented in similar manner.
 Information is measured and reported in a similar fashion across entities.
 Users are informed of the accounting policies employed, changes in those policies and the effects of
such changes.

Consistency
 Then an entity applies the same accounting treatment to similar events from period to period.
 The effect of changes in accounting upon income should be property disclosed.
 Relates to both relevance and faithful representation.
Financial information exhibits consistency when accounting entities gives similar events the same accounting
treatment each period.

Verifiability
 The characteristic that is demonstrated when a high degree of consensus could be secured among
independent measurers using the same measurement method.
 Concept of accounting holds that to the maximum extent possible, financial statements shall be based
on arm’s length transactions.
 Historical cost has been the valuation basis most commonly used in financial accounting.
 The ability through consensus among measurers to ensure that information represents what it
purports to represent.

Fair value is more relevant- argument against historical cost

Timeliness- an entity issuing the annual financial reports within one month at the end of reporting period.

Timeliness and verifiability- allowing entities to estimate rather than physically count inventory at an
interim period.

Neutrality- not biased in favor of one group of users to the detriment of others.

Understandability
 Users have reasonable knowledge of business and economic activities and review the information
with reasonable diligence.
 Linkage between users and the decisions made.
 Classifying, characterizing ad presenting information clearly and concisely.

The Conceptual Framework includes Cost constraints.

The overriding qualitative characteristics of accounting information is decision usefulness.

An item would be considered material and therefore would be disclosed in the financial statements when the
omission or misstatement of the amount would make a difference to the users.

Materiality
 An item must make a difference or it need not be disclosed.
 Materiality is a matter of relative size
 An item is material if the inclusion or omission would influence or change the judgment of a reasonable
person.

Cost and benefit constraints- the benefit of the information must be grater than cost of providing it.

Conservatism is best described as selecting an accounting alternative that has the least favorable impact on
equity. Pertaining to recording contingencies.

The Conceptual Framework excludes prudence or conservatism because it is inconsistent with neutrality.
Proponents of historical costs maintain that in comparison with all other valuation alternatives for general
purpose financial reporting, statements prepared using historical costs are more objective.
……………

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