Lecture 2. Conceptual Framework - Qualitative Characteristics

FATHER SATURNINO URIOS UNIVERSITY
ACCOUNTANCY PROGRAM
LESSON 2: CONCEPTUAL FRAMEWORK – QUALITATIVE CHARACTERISTICS
Qualitative Characteristics are the qualities or attributes that make financial accounting information useful to the users.
Classification:
Fundamental Qualitative Characteristics (FQC)– relate to the content and substance of financial information.
1. Relevance – capacity of the information to influence a decision. Financial Information is capable of making a
difference in a decision if it has a predictive value and confirmatory value (Ingredients of Relevance)
Predictive value – it can be used as an input to processes employed by users to predict future outcome. Financial
information has predictive value when it can help users increase the likelihood of correctly or accurately predicting or
forecasting outcome of events. (ex. Net cash provided by operating activities is valuable in predicting loan payment or
default).
Confirmatory value – financial information has confirmatory value if it provides feedback about previous
evaluations. Financial information has confirmatory value when it enables users confirm or correct earlier expectations.
Materiality is a practical rule in accounting which dictates that strict adherence to GAAP is not required when the items
are not significant enough to affect the evaluation, decision and fairness of the financial statements. Also known as
“doctrine of convenience”.
Materiality is a quantitative “threshold” linked very closely to relevance. The RELEVANCE of information is affected by
its nature and materiality. In other words, It is a “subquality” of relevance based on the nature or magnitude or both of the
items to which the information relates. Conceptual Framework does not specify a uniform quantitative threshold for
materiality.
Therefore, materiality is a relativity. Materiality depends on relative size rather than absolute size. Materiality is
dependent on good judgment/professional judgment.
Information is material if its omission or misstatement could influence the economic decision that users make on the basis
of the financial information about the entity. In determining materiality size and nature of an item is considered.
2. Faithful Representation – financial reports must match what really existed or happened.
Ingredients (CFN): 1. Completeness – adequate disclosure standard or the principle of full disclosure: disclosure
of any financial facts significant enough to influence the judgment of informed users.
2. Free from errors
3. Neutrality – free from bias.
Inherent in faithful representation the concept of “substance over form”. For the information to be faithfully represented it
represents the substance of an economic transaction rather than representing the legal form.
CONSERVATISM or PRUDENCE (these term are synonymous) is not included in the Conceptual Framework because it
would be inconsistent with neutrality.
S.Espina, CPA
CONSERVATISM – “in case of doubt, record any loss and do not record any gain”.
PRUDENCE – “desire to exercise care and caution when dealing uncertainties in the measurement process such that
assets or income are not overstated and liabilities or expenses are not understated.
Enhancing Qualitative Characteristics (EQC) – relates to the presentation or form of the financial information.
- intended to increase the usefulness of the financial information that is relevant and faithfully represented.
EQC :TVUC
Timeliness – financial information must be available or communicated early enough when a decision is to be
made.
Verifiability – different knowledgeable and independent observers could reach consensus, although necessarily
complete agreement, that a particular depiction is a faithful representation. Verifiability implies consensus. It is verifiable,
if it is supported by evidence.
Understandability – requires that financial information must be comprehensible or intelligible if it is to be most
useful.
Comparability – means ability to bring together for the purpose of noting points of likeness and difference.
Intracomparability – Comparability within an entity through time or from one accounting period to the next.
Intercomparability – Comparability between and across entities is the quality of information that allows comparisons
between two or more entities engaged in same industry.
Implicit of comparability the principle of CONSITENCY. It refers to the use of the same method for the same item, either
from period to period within an entity or in a single period across entities.
COMPARABILITY is the goal and CONSISTENCY helps to achieve the goal.
COST CONSTRAINT ON USEFUL INFORMATION

Cost constraint is a consideration of the cost incurred in generating financial information against the benefit to be
obtained from having the information.
The benefit derived from the information should exceed the cost incurred in obtaining the information.
S.Espina, CPA

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FATHER SATURNINO URIOS UNIVERSITY

LESSON 2: CONCEPTUAL FRAMEWORK – QUALITATIVE CHARACTERISTICS

COST CONSTRAINT ON USEFUL INFORMATION

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