What are the qualitative characteristics that enhance the decision usefulness of relevant information faithfully represented in financial statements?
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For financial information to be of any use to investors, creditors, and other stakeholders, it must exhibit certain required and desired attributes. These attributes are called qualitative characteristics of useful financial information. Show
The IASB and FASB have identified these characteristics in their conceptual frameworks because these guide their standard-setting process. Qualitative characteristics of useful financial information are categorized into fundamental qualitative characteristics and enhancing qualitative characteristics. Fundamental qualitative characteristicsFundamental qualitative characteristics are those whose absence makes financial information no longer useful. Relevance and faithful representation are the fundamental qualitative characteristics. Relevance gives financial information the capability of making a difference in decisions made by users. Such capability arises when the information has either predictive value, confirmatory value, or both. Relevance is applicable in the context of materiality. Materiality is the quality of financial information which makes its omission or misstatement significant enough to impact the decisions that users make through reliance on the information. Materiality acts as a filter on relevant information such that relevant information is useful only when it is material. Faithful representation is achieved when financial information truthfully represents the underlying economics of a phenomena. This is achieved when information is complete, neutral (without any understatement or overstatement bias) and free from error (at least in the process used to produce the information). Enhancing qualitative characteristicsEnhancing qualitative characteristics improve usefulness of financial information. However, neither do they compensate for lack of relevance or faithful presentation nor their absence make the information useless. They help decide between two equally relevant and true and faithful accounting choices for a single transaction. Preparers of financial information must achieve to maximum enhancing qualitative characteristics. Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. Comparability requires financial information to be comparable across periods and companies. Comparability is achieved through consistency. Verifiability is the property which enables different knowledgeable users to agree that particular financial information exhibits truthful representation. It improves usefulness of financial statements because it assures users that they are indeed true and fair. Timeliness is achieved when financial information is made available early enough for it to impact decisions made by the users. Understandability requires financial information to be classified, characterized and presented such that it can be understood by users with reasonable knowledge of business and economic activities. by Obaidullah Jan, ACA, CFA and last modified on Oct 30, 2020 Financial information has several qualities that make it useful. These qualities are outlined in Chapter 3 of the Conceptual Framework for Financial Reporting, approved by the International Accounting Standards Board (IASB). Fundamental Qualitative Characteristics1. RelevanceRelevant information is capable of making a difference in the decisions made by users. Relevance requires financial information to be related to an economic decision. Otherwise, the information is useless. Financial information is useful if it has predictive value and confirmatory value. Predictive value helps users in predicting or anticipating future outcomes. Confirmatory value enables users to check and confirm earlier predictions or evaluations. Materiality is an aspect of relevance which is entity-specific. It means that what is material to one entity may not be material to another. It is relative. Information is material if it is significant enough to influence the decision of users. Materiality is affected by the nature and magnitude (or size) of the item. 2. Faithful RepresentationThe financial information in the financial reports should represent what it purports to represent. Meaning, it should reflect what really happened, with the correct financial values. There are three characteristics of faithful representation: 1. Completeness (adequate or full disclosure of all necessary information), 2. Neutrality (fairness and freedom from bias), and 3. Free from error (no inaccuracies and omissions). Enhancing Qualitative Characteristics1. ComparabilityComparable information enables comparisons within the entity and across entities. When comparisons are made within the entity, information is compared from one accounting period to another. For example: income is compared for the years 2019, 2020, and 2021. Comparability of information across entities enables analysis of similarities and differences between different companies. 2. VerifiabilityVerifiability helps to assure users that information represents faithfully what it purports to represent. Financial information is supported by evidence and independent individuals can check them to see whether such information is faithfully represented. In other words, information is verifiable if it can be audited. 3. TimelinessTimeliness means providing information to decision-makers in time to be capable of influencing their decisions. It shouldn't be significantly delayed or else it will be of little or no value. 4. UnderstandabilityUnderstandability requires financial information to be understandable or comprehensible to users with reasonable knowledge of business and economic activities. To be understandable, information should be presented clearly and concisely. However, it is improper to exclude complex items just to make the reports simple and understandable. Key Takeaways Fundamentally, financial statement information needs to be 1) relevant and 2) faithfully represented. Faithful representation means that information is complete, neutral, and free from bias. The quality of financial statements is enhanced by comparability, verifiability, timeliness, and understandability. Web link APA format Qualitative characteristics of financial information
(2022). Accountingverse. Next Lesson → Previous Lesson ← Chapter Outline ≡ What are the qualitative characteristics of accounting information for financial reporting?Qualitative characteristics of accounting information that impact how useful the information is: Verifiability. Timeliness. Understandability.
How does relevance and faithful representation enhance usefulness of financial accounting?Fundamentally, financial statement information needs to be 1) relevant and 2) faithfully represented. Faithful representation means that information is complete, neutral, and free from bias. The quality of financial statements is enhanced by comparability, verifiability, timeliness, and understandability.
Which qualitative characteristics relate to the presentation of financial statements?Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. The four principal qualitative characteristics are understandability, relevance, reliability and comparability.
What are the attributes that make the information provided in the financial statements?What makes a financial statement useful? FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
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