Accounting information is crucial for decision-making by various stakeholders, including management, investors, creditors, and regulators. For accounting information to be useful, it should possess certain characteristics that make it relevant and reliable. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have identified several qualitative characteristics of useful accounting information.
Key Facts
- Relevance: Accounting information should be capable of influencing economic decisions made by users. It should help users predict future events, evaluate past decisions, and determine alternative courses of action.
- Reliability: Users should be assured that the information presented represents faithfully, without bias, the transactions and events being reported. Reliability is achieved by recording assets at their original historical cost and avoiding the use of estimates, appraisals, or opinions.
- Comparability: Accounting information should be comparable, allowing users to make meaningful comparisons between different entities or across different time periods. Consistent application of accounting principles and policies enables this comparability.
- Verifiability: Accounting information should be verifiable, meaning that independent observers using the same methods should obtain similar results. This helps ensure the reliability and credibility of the information.
- Timeliness: Accounting information should be timely, meaning it should be available to decision-makers before it loses its capacity to appropriately inform decisions. Delays in reporting can reduce the usefulness of the information.
- Understandability: Accounting information should be presented in a clear and concise manner so that users with a reasonable knowledge of business and economic activities can comprehend its meaning. Complexity should be minimized, and the information should be organized and presented in a way that facilitates understanding.
Relevance
Relevant accounting information is capable of influencing economic decisions made by users. It should help users predict future events, evaluate past decisions, and determine alternative courses of action. Relevant information should possess the following attributes:
- Predictive value: Information that helps users form expectations about future events or outcomes.
- Confirmatory value: Information that confirms or changes users’ past evaluations or assessments.
- Materiality: Information that is material if its omission or misstatement could influence the decisions of users.
Reliability
Faithful representation implies that the accounting information accurately reflects the economic substance of business transactions and events. Faithful representation includes:
- Completeness: All necessary information is provided, and nothing significant is omitted.
- Neutrality: Information is free from bias and is not intended to favor one party over another.
- Free from error: Information is as accurate as possible, with no material errors or omissions.
Comparability
Accounting information should be comparable, which means it can be used to identify similarities and differences between different entities or across different time periods. Consistent application of accounting principles and policies enables users to make meaningful comparisons.
Verifiability
Verifiable accounting information means that different knowledgeable and independent observers would reach a consensus that the information is a faithful representation of the economic events it represents. Verifiability helps to ensure that the information is reliable and credible.
Timeliness
Timely information is available to users before it loses its relevance for decision-making. Delays in reporting accounting information can reduce its usefulness and may lead to users making decisions based on outdated information.
Understandability
Accounting information should be presented in a clear and concise manner so that users with a reasonable knowledge of business and economic activities can comprehend its meaning. Complexity should be minimized, and the information should be organized and presented in a way that facilitates understanding.
References
- Charles Darwin University. (n.d.). Qualitative Characteristics of Accounting Information. Retrieved from https://cduebooks.pressbooks.pub/accounting/chapter/accounting-information/.
- Tutor2u. (2021, March 22). Accounting Information – Characteristics. Retrieved from https://www.tutor2u.net/business/reference/accounting-information-characteristics.
- SuperfastCPA. (n.d.). What are the Characteristics of Useful Accounting Information? Retrieved from https://www.superfastcpa.com/what-are-the-characteristics-of-useful-accounting-information/.
FAQs
What is the importance of having useful accounting information?
Useful accounting information helps decision-makers make informed choices about the allocation of resources, the assessment of an entity’s performance, and the evaluation of financial risks and opportunities.
What are the primary qualitative characteristics of useful accounting information?
The primary qualitative characteristics of useful accounting information are relevance, reliability, comparability, verifiability, timeliness, and understandability.
How does relevance contribute to the usefulness of accounting information?
Relevance means that accounting information can influence economic decisions by helping users predict future events, evaluate past decisions, and determine alternative courses of action.
What does faithful representation mean in the context of accounting information?
Faithful representation implies that accounting information accurately reflects the economic substance of business transactions and events, without bias or material errors or omissions.
Why is comparability important in accounting information?
Comparability allows users to identify similarities and differences between different entities or across different time periods, enabling meaningful comparisons and informed decision-making.
How does verifiability enhance the usefulness of accounting information?
Verifiability ensures that different knowledgeable and independent observers would reach a consensus that the accounting information is a faithful representation of the economic events it represents, increasing its reliability and credibility.
Why is timeliness crucial for accounting information?
Timeliness means that accounting information is available to decision-makers before it loses its relevance for decision-making. Delays in reporting can reduce the usefulness of the information and may lead to decisions based on outdated information.
How does understandability impact the usefulness of accounting information?
Understandability means that accounting information is presented in a clear and concise manner, enabling users with a reasonable knowledge of business and economic activities to comprehend its meaning. Complexity should be minimized, and the information should be organized and presented to facilitate understanding.