Financial Accounting

The Qualitative Characteristics of Financial Information

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In order for the financial statements to be useful to the stakeholders of a business, they must embody certain qualitative characteristics. These characteristics are categorised in two parts i.e. fundamental qualitative characteristics and enhancing qualitative attributes. They are explained as follows:

qualitative characteristics of financial information

The Fundamental Qualitative Characteristics

Relevance – The information should be relevant to the requirement of the users. The relevant financial information helps the users of the financial statements to take a different economic decision. For financial decision making, financial information have to be predictive or information, or both. Predictive Values help users in anticipating future outcomes. On the other hand, confirmatory values help users to check and confirm predictions and evaluations.

Materiality is also included as an element of relevance.

Faithful Representation – one of the fundamental qualitative characteristics is a faithful representation.  The information of the financial statement must be reliable, i.e. the information should be free of material errors and biases (Nobes & Stadler, 2015). The data should not be misstated. The source of information should be authentic, and the transactions should be represented faithfully. The same should not be misled

Enhancing Qualitative Characteristics

Enhancing Qualitative Characteristics

Comparability – Accounting information should be such that it should be possible to compare an entity over time and with similar information about other entities. Comparability facilitates decision-makers to understand various controllable and non-controllable factors behind the success or failure of the performance of the company. Accordingly, they can make future decisions.

Verifiability – if information can be verified (e.g. through an audit) this provides assurance to the users that it is both credible and reliable.

Timeliness – information should be provided to users within a timescale suitable for their decision-making purposes. Delays in the publication of financial information reduce the usefulness of the information.

Understandability – Information presented in the financial statements should be understandable to those that might want to review and use it. This can be facilitated through appropriate classification, characterisation and presentation of information.

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