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6 main qualitative characteristics of financial statements.

If financial information is to be  useful, it must be relevant and faithfully represent what it purport to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable with the fundamental qualitative characteristics being relevance and faithful representation.

Relevance

To be useful information must be relevant to the decision making needs of the user. The information has the quality of relevance when it influence the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting, their past evaluations. The relevance of information is affected by its nature and materiality. In some cases, the nature of information alone is sufficient to determine its relevance. In other cases, both the nature and materiality are important. Information is material if its omission or misstatements could influence the economic decisions of users taken on the basis of financial statements.

Faithful representation

Financial reports represent economic phenomena in words and numbers. To be useful, financial information  must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purport to represent. To be perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from errors. of course, perfection is seldom, if ever, achievable.
A complete depiction include all information necessary for the user to understand the phenomenon being depicted, including all necessary description and explanations. A neutral depiction is without bias in the selection of financial information. A neutral depiction is not slanted, weighted, emphasized, de-emphasized or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably by users. Faithful representation does not mean accurate in all aspects. Free from errors means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. In this context, free from errors does not mean perfectly accurate in all aspects. However representation of  estimate can be faithful if the amount is described clearly and accurately as being estimate, the nature and limitations of the estimating process are explained and no errors have been made in selecting and applying an appropriate process for developing an estimate.comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.

Comparability

comparability is qualitative characteristics that enables users to identify and understand similarities in and differences among items. Users must be able to compare the financial statements of the entity through time in order to identify trends in its financial positions and performance. Users must also be able to compare the financial statements of different entities in order to evaluate their relative financial position, performance and changes in financial position. Hence, the measurement and display of the financial effect of the like transactions and other events must be carried out in the consistent way throughout an entity and over time for that entity and in consistent way for different entities. The need for comparability should not be confused with mere uniformity. it is inappropriate for an entity to leave its accounting policies unchanged when more relevant and reliable alternatives exists. It is important that financial statement show corresponding information for the preceding periods. Permitting alternative accounting method for the same accounting phenomenon diminishes comparability.

Timeliness

Timeliness means having information available to the decision makers in time to be capable of influencing their decisions. Generally, the older the information the less useful it is. However some information may continue to be timely long after the end of reporting period because, for example , some users may need to identify and assess trends.

Verifiability

Verifiability helps assure that the information faithfully represent the economic phenomenon it purport to represent. verifiability means that different knowledgeable and independent observers could reach consensus, although not complete agreement ,  that a particular depiction is faithful representation. Quantified information need not be a single point estimate to be verifiable.  a range of possible amounts and the related probabilities can also be verified. Verification can be direct or indirect. Direct verification means verifying an amount or other representation through direct observation, for example by, counting cash. Indirect verification means checking the inputs to the model , formula or other techniques  and recalculating the output  using the same methodology. It may not be possible to verify some explanations and forward looking financial information until a future period, if at all. To help the user decide whether they want to use that information, it would normally be necessary to disclose the underlying assumptions, the method of compiling the information and other factors and circumstances that support the information.

Understandability

classifying, characterizing and presenting information clearly and concisely makes it understandable. Some aspects of financial statements are inherently complex and can not be made easy to understand. Excluding information about these from financial reports might make the information in those financial reports easier to understand. However those reports would be incomplete and therefore potentially misleading. Users must be able to understand financial statements. They are assumed to have reasonable knowledge of business and economic activities and accounting and a willingness to study the information properly. Complex matters, if relevant for decision making, should not be left out of financial statements simply due to its difficult in being understood.

5 thoughts on “6 main qualitative characteristics of financial statements.”

  1. Pingback: 5 differences between financial accounting and management accounting – ACCOUNTING CLASS

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