Financial statements are essential tools for communicating financial information to users to make informed decisions. The qualitative characteristics of financial statements are the attributes that make them useful and reliable for decision-making. These characteristics are divided into two categories: fundamental and enhancing.
Key Facts
- Fundamental Qualitative Characteristics:
- Relevance: Financial information should have predictive and confirmatory value for users in making and evaluating economic decisions. It should be material, meaning that omitting or misstating it could influence decision making.
- Faithful Representation: Financial information should faithfully represent the phenomena it purports to represent. It should be complete, neutral, and free from error.
- Enhancing Qualitative Characteristics:
- Comparability: Users should be able to compare aspects of an entity over time and between entities. Transactions and events should be measured and displayed consistently or fully explained if measured or displayed differently.
- Verifiability: Financial information should provide assurance that it faithfully represents what it purports to represent.
- Timeliness: Accounting information should be available to stakeholders in time for decision-making purposes.
- Understandability: Financial reports should be prepared in a clear and concise manner, assuming that users have a reasonable knowledge of the business and its economic activities.
Fundamental Qualitative Characteristics
The two fundamental qualitative characteristics of financial statements are:
Relevance
Relevance implies that the information provided in the financial statements should have predictive and confirmatory value for users in making and evaluating economic decisions. It should be material, meaning that omitting or misstating it could influence decision-making.
Faithful Representation
Faithful representation implies that the financial information should faithfully represent the phenomena it purports to represent. It should be complete, neutral, and free from error.
Enhancing Qualitative Characteristics
The four enhancing qualitative characteristics of financial statements are:
Comparability
Comparability implies that users should be able to compare aspects of an entity over time and between entities. Transactions and events should be measured and displayed consistently or fully explained if measured or displayed differently.
Verifiability
Verifiability provides assurance that the financial information faithfully represents what it purports to represent.
Timeliness
Timeliness implies that the accounting information should be available to stakeholders in time for decision-making purposes.
Understandability
Understandability implies that financial reports should be prepared in a clear and concise manner, assuming that users have a reasonable knowledge of the business and its economic activities.
These qualitative characteristics are essential for ensuring the usefulness and reliability of financial statements. By adhering to these characteristics, financial statements can provide valuable information to users for making informed economic decisions.
References
- Birt J., et al. (2020). Accounting: Business Reporting for Decision Making 7th John Wiley & Sons Australia, Ltd.
- https://accounting.binus.ac.id/2021/10/01/qualitative-characteristics-of-financial-reports/
- https://www.universalcpareview.com/ask-joey/what-are-the-fundamental-qualitative-characteristics-of-financial-statements/
- https://accountingware.com/activreporter/blog/elements-of-a-good-financial-design-statement
FAQs
1. What are the two fundamental qualitative characteristics of financial statements?
Relevance and faithful representation.
2. What does relevance mean in the context of financial statements?
Relevance means that the information provided in the financial statements should be useful for users in making and evaluating economic decisions.
3. What does faithful representation mean in the context of financial statements?
Faithful representation means that the financial information should accurately and completely represent the financial position and performance of the entity.
4. What are the four enhancing qualitative characteristics of financial statements?
Comparability, verifiability, timeliness, and understandability.
5. What does comparability mean in the context of financial statements?
Comparability means that users should be able to compare the financial statements of an entity over time and with the financial statements of other entities.
6. What does verifiability mean in the context of financial statements?
Verifiability means that the financial information can be independently verified and confirmed.
7. What does timeliness mean in the context of financial statements?
Timeliness means that the financial information is available to users in a timely manner to be useful for decision-making.
8. What does understandability mean in the context of financial statements?
Understandability means that the financial statements are presented in a clear and concise manner so that users with a reasonable knowledge of business and financial matters can understand them.