These characteristics describe what useful information is and how it relates to financial decision-making. The financial statement should contain information “sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom it is addressed”. Comparable information enables comparisons within the entity and across entities. Consistency is not the same as Comparability. 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The standards expect that the estimates are made on a realistic basis and not arbitrarily. The two fundamental Qualitative characteristics are : Relevance: In accounting, the term relevance means it will make a difference to a decision maker. Confirmatory value enables users to check and confirm earlier predictions or evaluations. Enhancing Qualitative Characteristics Comparability, verifiability, timeliness and understandability are directed to enhance both relevant and faithfully represented financial information. Faithful Representation: The information accurately reflects the financial state of the business. It means that different knowledgeable and observers could reach consensus that a particular depiction is a Faithful Representation. It's not enough for a company to say the answer is "2." Describe what you understand by the above statement and explain briefly the qualitative characteristics. For example, in the decision to replace an equipment that has been used for the past six years, the original cost of the equipment does not have relevance. Materiality provides guidance on what transactions are to be aggregated by virtue of its specifying which items should be disclosed separately. (1) The Framework deals with the qualitative characteristics of financial statements. let us take a look. Information has predictive value if it helps users to evaluate or assess past, present or future events. financial state­ments and the reporting entity. Here's another expression of relevance: Costs that will differ among alternatives. All the characteristics are attributes that make the information provided in financial statements are useful to users. A common application of materiality concerns weather an item of expenditure is to be regarded as a non-current asset or an expense. Comparability is including consistency and disclosure. Some academics regard disclosure as a fundamental qualitative characteristics of financial statements. That does not mean no inaccuracies can arise, particularly in case of making estimates. When comparisons are made within the entity, information is compared from one accounting period to another. It is one of the main reasons why accountants are often described as conservative, prudent, cautious, and pessimistic and so on. Qualitative Characteristics of Financial Statements Enhancing Characteristics from CBA 2012-11569 at Lyceum of the Philippines University - Cavite - General Trias, Cavite Actually there are four qualitative characteristics of financial statements. Your email address will not be published. Reliability: Reliability is described as one of the two primary qualities (relevance and reliability) that … To be able to view similarity prepared financial statements over time allows users to make judgments about trends in performance and in changes in financial position and use this information to predict into the future. Having timeliness and relevance may mean sacrificing some precision or reliability. According to BDO (2010), the qualitative characteristics of useful financial information apply to financial information Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. Your email address will not be published. Reliability: Reliability is described as one, of the two primary qualities (relevance and reliability) … Problems in understanding may arise due to user’s inabilities or because of the information itself. Discuss and describe two IASB / AASB accounting standards and the utilisation of the qualitative characteristics to promote decision useful information. Qualitative Characteristics of Financial Statement. Another common application of materiality relates to separate disclosure of certain items in financial managements. Faithful Representation is the second Fundamental Qualitative Characteristic. concepts of capital and capital main­te­nance. However, the information they provide to the users have some important qualitative characteristics. Qualitative Characteristics of financial statements include: Relevance: The accounting information provided is useful to stakeholders. The Financial Accounting Standards Board, which writes the rules for the U.S. accounting profession, says that verifiability provides assurance that "accounting measures represent what they purport to represent." It means that what is material to one entity may not be material to another. They can compare the trade receivables in current year to those last year. Next, Reliability is including faithful representation, being natural, free form material error, complete, and prudent. 2. An omission can cause the financial statements to be false or misleading and thus unreliable and deficient in terms of its relevance. (fairness and freedom from bias), We often refer to a term called True and Fair View in Accounting. The financial statements are published to address the shareholders of the company. Meaning, it should show what really are present (Example: Position of Assets and Liabilities) and what really happened (Example: Position of Income and expenditure), as the case may be. Enhancing qualitative characteristics of Financial Statements should be maximized by the entity to the extent necessary. (3) The Framework deals with the objectives of financial statements. The four characteristics are understandability, relevance, reliability, and comparability. To be reliable, information should faithfully represent the underlying transaction or event, reflect the substance of the underlying transaction or event, be neutral, be prudent and complete. c. Qualitative characteristics are non-qualitative aspects of financial position and financial performance. The objective was to demonstrate how the qualitative characteristics, as defined by the IASB can be operationalised. Usually the Statute specifies the time for preparation and presentation of Financial reports. Materiality : Information is material if omitting it, or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. The study examined the perception of Nigerian accountants on the quality of financial reporting and the use of qualitative characteristics in the measurement of financial reporting quality. These qualities are outlined in Chapter 3 of the Conceptual Framework for Financial Reporting, approved by the International Accounting Standards Board (IASB). Verifiability helps assure that Information faithfully represents the economic phenomena it purports to represent. Materiality is an aspect of relevance which is entity-specific. Therefore, information should have predictive value or confirmatory value. First, understandability is including taking into consideration users’ abilities, and aggregation and classification of information. It is help to achieve comparability. For example, the benefit of providing a list of all the credit customer balances at the yearend limited, whereas a total figure for all the trade receivables does provide information that can be of use to users. The crux of prudence is prepares of accounting information should exercise prudent views when making judgments about uncertain items such as provisions for doubtful debts, asset lives or the number of warranty claims that might occur. verifiability also doesn't pass judgment on whether the assumptions made are correct or even appropriate, just whether the result matches the assumptions. Those characteristics should be maximised both individually and in combination. It also has to show you the "1 + 1" on the other side of the equation. Completeness :-- Information in financial statement must be complete. 11. The information has the quality of reliability when it is free material error; free from deliberate or systematic basic; can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. To have prediction value, information need not be in the form of an explicit forecast. Users cannot use such financial information that they cannot understand. The four characteristics are understandability, relevance, reliability, and comparability. Therefore, a diligent user can determine changes in the performance and financial position of the entity that resulted from normal activities that are expected to continue into the future. That is why the FASB created the qualitative characteristics of financial information. To be reliable, information provided in financial statements needs to be neutral. The timeliness of accounting information refers to the provision of information to users quickly enough for them to take action. Materiality is affected by the nature and magnitude (or size) of the item. 17. According to the Framework, the information provided by financial statements needs to be readily understandable by users, it also means that users need to be able to perceive its significance. Understandability includes users’ abilities and aggregation and classification. Verifiability doesn't have to do with determining the truthfulness of the data a company provides, but rather with making sure its results logically flow from the data. Actually there are four qualitative characteristics of financial statements. In other words, the original cost is irrelevant or is not relevant in the decision to replace the equipment. 2. A principle which states that a company's financial information should be presented in such a way that a person with a reasonable knowledge of business and finance, and the willingness to study the information, should be able to comprehend it. Not exceed related benefits unless there is a conflict between the two is enhanced by the manner which! Similarities and differences among items past, present or future events decision of users should be maximised individually! 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