Financial reporting relies on qualitative characteristics to ensure the usefulness and reliability of the information presented. These characteristics are divided into two categories: fundamental qualitative characteristics and enhancing qualitative characteristics.
Key Facts
- Fundamental Qualitative Characteristics:
- Relevance: Financial information is relevant if it can influence the decisions of users by having predictive or confirmatory value.
- Faithful Representation: Financial information should faithfully represent the economic phenomena it purports to represent. This means it should be complete, neutral, and free from error.
- Enhancing Qualitative Characteristics:
- Comparability: Financial information should be comparable, allowing users to compare it with similar information about other entities or the same entity for another period.
- Verifiability: Financial information should be verifiable, meaning that different knowledgeable and independent parties could reach consensus that it is a faithful representation.
- Timeliness: Financial information should be provided in a timely manner, as the sooner it is available, the more useful it is.
- Understandability: Financial information should be presented clearly and concisely, making it understandable to users with a reasonable knowledge of the business.
Fundamental Qualitative Characteristics
Relevance
Relevance refers to the ability of financial information to influence the decisions of users by providing predictive or confirmatory value. Predictive value allows users to make informed predictions about future outcomes based on the information provided. Confirmatory value enables users to confirm or revise their existing evaluations.
Faithful Representation
Faithful representation requires that financial information accurately reflects the economic phenomena it purports to represent. This means the information should be complete, neutral, and free from error. Completeness ensures that all relevant information is included, neutrality eliminates bias in the selection or presentation of information, and freedom from error guarantees the accuracy of the reported information.
Enhancing Qualitative Characteristics
Comparability
Comparability allows users to compare financial information across different entities and time periods. Consistent measurement and display of transactions and events facilitate comparability. If different methods are used, they should be fully explained.
Verifiability
Verifiability provides assurance that financial information faithfully represents what it claims to represent. Different knowledgeable and independent parties should be able to reach a consensus on the faithful representation of the information.
Timeliness
Timeliness ensures that financial information is available to users in a timely manner for decision-making purposes. The sooner the information is available, the more useful it is.
Understandability
Understandability requires that financial information be presented clearly and concisely. Preparers should classify, characterize, and present information in a manner that is comprehensible to users with a reasonable knowledge of the business and its economic activities.
References:
- Association of Chartered Certified Accountants (ACCA). (2023). Qualitative accounting characteristics. https://www.accaglobal.com/gb/en/student/exam-support-resources/foundation-level-study-resources/fa2/fa2-technical-articles/qualitative-acc.html
- Bina Nusantara University. (2021). Qualitative characteristics of financial reports. https://accounting.binus.ac.id/2021/10/01/qualitative-characteristics-of-financial-reports/
- Universal CPA Review. (2023). What are the fundamental qualitative characteristics of financial statements? https://www.universalcpareview.com/ask-joey/what-are-the-fundamental-qualitative-characteristics-of-financial-statements/
FAQs
What is the purpose of qualitative characteristics in accounting?
Qualitative characteristics are essential for ensuring the usefulness and reliability of financial information.
What are the two fundamental qualitative characteristics?
The two fundamental qualitative characteristics are relevance and faithful representation.
What are the four enhancing qualitative characteristics?
The four enhancing qualitative characteristics are comparability, verifiability, timeliness, and understandability.
What does relevance mean in the context of accounting?
Relevance refers to the ability of financial information to influence the decisions of users by providing predictive or confirmatory value.
What does faithful representation mean in the context of accounting?
Faithful representation requires that financial information accurately reflects the economic phenomena it purports to represent.
Why is comparability important in accounting?
Comparability allows users to compare financial information across different entities and time periods, which is essential for making informed decisions.
What is the significance of verifiability in accounting?
Verifiability provides assurance that financial information faithfully represents what it claims to represent, enhancing the reliability of the information.
Why is timeliness important in accounting?
Timeliness ensures that financial information is available to users in a timely manner for decision-making purposes, as the sooner the information is available, the more useful it is.