Week 4 - Objective of The General Purpose Financial Reporting and Qualitative Characterestics
Week 4 - Objective of The General Purpose Financial Reporting and Qualitative Characterestics
Week 4 - Objective of The General Purpose Financial Reporting and Qualitative Characterestics
Financial statements must meet some characteristics or attributes in order for the information to become
more useful and meaningful. These are divided into two (2) groups: the Fundamental Qualitative
characteristics; and the Enhancing Qualitative characteristics.
Preview!!!
Why do you think QUALITY is a very important element relating to financial information?
When buying jeans, the first thing that I look into is the brand, taking into consideration also is the price but
that is just secondary when you are not on budget, right?. In my case, I will prefer, in the order of priority, 1)
Levis, 2) Lee and 3) Jag. So Levis is in my top 1 list, why Levis? It has been there for a long period of time;
I have been using it and not only me, also my family. It has been tested and proven through time that it last
longer than the other brands.
So what am I getting into? It is a trusted Brand, it has QUALITY and it has CREDIBILITY.
In the same light, I would like to compare the financial statements (F/S) that a CPA has painstakingly
prepared for one accounting cycle with utmost care. If the F/S will be the basis for making decisions, it is a
MUST that is prepared by someone who is knowledgeable on some accounting rules and procedures. In
other words, it must be characterized with QUALITY to make it a credible basis for making a decision.
How can we achieve that? Let us discuss them one by one as we go along.
2) Faithful Representation
What is Relevance?
*When financial information can help users to plan or predict correctly the outcome of events in the future, it
has predictive value.
*Financial information has confirmatory value if it provides feedback about previous evaluations.
Information with predictive value also has confirmatory value. Both terms are interrelated. An
example is the revenue for this year will be used to predict the revenue next year while it can also be used
to compare revenue predictions in the past years. The first part of the sentence making forecast of future
revenues by using the revenue figure at present is predictive value while is confirmatory value is comparing
predictions or forecasts made in the past. Both predictive and confirmatory value result will be used to
correct or improve processes for the future.
The conceptual framework states that Materiality is an entity-specific aspect of relevance. Materiality
depends on the facts and circumstances surrounding a specific entity. The Conceptual Framework and the
Standards do not specify a uniform quantitative threshold for Materiality.
Materiality is a matter of judgment. This has been thoroughly discussed in your F A R subject.
2) The recognition of an Impairment Loss to record the destruction of a building by typhoon is an example
of Faithful Representation.
To achieve the goal of Faithful Representation, financial information must have all of the following
characteristics:
• Completeness– is the result of adequate disclosure. To be complete, financial statements shall be
accompanied by Notes to Financial Statements that provides in narrative form and description of the
items presented in the financial statements and other items that do not qualify for recognition.
• Neutrality– means free from bias. The financial statements must not favor the needs of just one
specific user. Financial Statements must be general purpose in nature. To be neutral is to be fair.
• Freedom from Error – does not mean perfectly accurate in all respects. Freedom from error means
that there are no omissions in description of the transactions and events, the process used to
produce the financial information has been selected and applied with no errors in the process. In
making estimates, Freedom from error is achieved when the amount is clearly and accurately
described as an estimate.
The Enhancing Qualitative Characteristics that will add to the reliability and usefulness of financial
information are:
2. Verifiability – an in formation is verifiable in the sense that it is supported by evidence so that when
another person will look into it and make his own computations using the same methods, he will
arrive at the same amount. Verifiability means that different knowledgeable and independent
observers could reach an agreement or a consensus that a particular depiction is a faithful
representation.
Example of Timeliness : If the annual stockholders’ meeting is scheduled on April 15, annual audit reports
should be distributed as early as the first week of first of March to give the stockholders ample time to
review the financial and other information. During annual stockholders’ meetings, major decisions are made
to formulate the policies for future plans. The financial statements play a major role in this decision-making
exercise.
4. Understandability – understandability relies on two factors, quality of the information and quality of
the user. Even though the information is well presented, it will be useless if the user does not
understand it.
*Classifying, characterizing and presenting information clearly and concisely makes it understandable (par
2.24, Conceptual Framework). For information to be useful, it must be adapted to the users’ range of
knowledge and understanding.