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Financial Reporting Standards

The qualitative characteristics of financial statements are understandability, relevance, materiality, reliability, comparability, and timeliness. However, achieving all of these characteristics is constrained by trade-offs that must be made. Financial statements must balance relevance with reliability, benefits with costs, and the various qualitative characteristics with each other. Omissions are also necessary, as some important non-quantifiable information cannot be included in financial statements. The overall goal is for financial statements to be useful while considering these constraints.

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23 views2 pages

Financial Reporting Standards

The qualitative characteristics of financial statements are understandability, relevance, materiality, reliability, comparability, and timeliness. However, achieving all of these characteristics is constrained by trade-offs that must be made. Financial statements must balance relevance with reliability, benefits with costs, and the various qualitative characteristics with each other. Omissions are also necessary, as some important non-quantifiable information cannot be included in financial statements. The overall goal is for financial statements to be useful while considering these constraints.

Uploaded by

Angeline Bautista
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Qualitative Characteristics of Financial Statement

 Understandability - information must be readily understandable to uses of the


financial statement. For this purpose, users are assumed to have a basic understanding of
finance and accounting. Para ma-present ang mga information sa paraan na maiintintihan
ng mga user. But no information about materiality or relevance should be left out of the
statement because it is deemed to complex. Even if the information is difficult to
understand it must be included if it is of importance.
 Relevance - the information must be relevant to the need of the users, which is the case
when the information influences their economic decisions. Para sa ibang users, ang kahit
na anong information na makakatulong sa kanilang pagdedesisyon about sa investing ay
malaking tulong para maevaluate nila ang past, present at pati na rin ang future events.
Relevant information is detailed enough to help users assess the risks and opportunities
of a company. Example. Information about the asset structure of the company can help a
user evaluate the future of a company. Sa pagpili ng level ng detail na iprepresent, isa
ang materiality sa mga criteria.
Materiality - means omission or misstatement of the information could make a
difference to user’s decisions. It depends on the size of the item or error judge in the
particular circumstances of its omission or misstatement.
 Reliability - the information must be free of material error, bias, and not misleading. It
is information that a user can depend upon to represent a company’s financial situation
faithfully and completely. Reliable information also reflects economic reality, not just the
legal form of a transaction or event

Factors that contribute to reliability


 Faithful representation - to reliable, information must present faithfully the
transaction and other events, either purports to represent or could reasonably be
expected to represent.
 Substance over form- if the information represent faithfully the transaction and other
events that is purports to represent, it is necessary that they are accounted for and
presented in accordance with their substance and economic reality and not merely
their legal form.
 Completeness- to be reliable, the information in financial statement must be
complete within the bound of materiality and cost.
 Comparability- information should be presented in a consistent manner over time and in
a a consistent manner between entities to enable users to make significant comparisons.
Users must be able to compare the financial statements of an entity through time in order
to identify trends in its financial position and performance. Users must also be able to
compare the financial statement of different entities in order to evaluate their relative
financial position, performance and changes in financial position.

[it would be ideal for financial statements to exhibit all of these qualitative
characteristics and thus to achieve maximal usefulness, there are several
constraints in achieving this goal.]

Constraints on Financial Statement


[One constraint is the necessity for trade-offs across the desirable
characteristics]
 Timeliness - to be relevant, information must be timely; if there is undue in the
reporting of information it may lose its relevance. Management may need to balance the
relevance merits of timely reporting and the provision of reliable information. It means it
may take considerable time to ensure the information is error-free. . The aim is a balance
between relevance and reliability.

[Another constraint on useful financial information is the cost of providing


this information]
 Balance between benefit and cost - the benefit derived from information should
exceed the cost providing it. The evaluation of benefits and cost is, however substantially
a judgement process. Again, the aim is a balance between costs and benefits

[constraint involves what financial statements omit.]


 Balance between qualitative characteristics - generally the aim is to achieve an
appropriate balance among the characteristics in order to meet the objective of financial
statements. Financial statements, by necessary, omit information that is nonquantifiable.
For example, the creativity, innovation, and competence of a company’s work force are
not directly captured in the financial statements.

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