Module 5: Fundamental of the accountant, but consult with

the management)
Qualitative Characteristics of  Information is material if omitting it
Useful Financial Information or misstating it could influence
decisions of primary users.
Additional Note:  If it becomes a serious consideration
- SFP – specific date in the decision to be made, the
- Income Statement – for a period of information is RELEVANT.
time (annual, semi-annual,  Materiality – entity-specific aspect
quarterly) of relevance based on the nature or
Primary Users magnitude of items to which the
 Existing and Potential Investors, information relates in the context of
Lenders and other Creditors an individual entity’s financial
(EPILOC) report.
 Stakeholders like the management Relevant information has:
and regulatory agencies  Predictive Value
- Used as an input in processes
Paragraph 2.4 employed by users to predict or
 If financial information is to be forecast future outcomes.
useful, it must be relevant and - Doesn’t refer to prediction or
faithfully represent what it purports forecast
to represent. - Financial information with predictive
 The usefulness of financial value is employed by users in
information is enhanced if it is making their own predictions.
enhanced it is comparable, - A single piece of information is
verifiable, timely and relevant, but two or more can make
understandable. it accurate.
 Confirmatory
Paragraph 2.20 - Provides feedback about (confirms
 Information must both be relevant or changes) previous evaluations
and provide a faithful
representation of what it purports These two values are interrelated. Usually,
to represent if it is to be useful. financial information that has predictive
value also has confirmatory value.
Fundamental Qualitative Characteristics
- Relevance 2. FAITHFUL REPRESENTATION
- Faithful Representation  In many cases, the substance of an
economic phenomenon and its legal
1. RELEVANCE form are the same.
 Capable of making a difference in  In case they are not the same,
the decision made by users. providing only the legal form would
 Pertains to the decision that has to not be enough to faithfully
be made and if it is material in represent the economic
nature (depends on the materiality phenomenon.
 coming up with that estimate are
Three Characteristics of Faith explained, and no errors have been
representation made in selecting and applying an
1. Complete appropriate process for developing
- Includes all information necessary to the estimate.
understand the phenomenon being - Measurement uncertainty arises
depicted when estimates are used, but it does
- Includes all necessary description not undermine the usefulness of
and explanations information for as long as the
2. Neutral estimates are clearly and accurately
- Without bias in the selection or described and explained.
presentation - Even a high level of measurement
- Objective; no hidden agenda uncertainty does not necessarily
- It is not slanted, weighted, prevent such an estimate from
emphasized, de-emphasized or providing useful information
otherwise manipulated to increase
probability that it will be received How to apply fundamental qualitative
favorably or unfavorable by users characteristics of useful financial
- Doesn’t mean that it has neither information?
purpose nor influence on decision Paragraph 2.21 provides the following
makers steps:
- Supported by PRUDENCE 1. Identify an economic phenomenon,
(conservatism) – the exercise of information about which is capable
caution when making judgments of being useful to users of the
under conditions of uncertainty reporting entity’s financial
- Prudence means that assets and information.
income are not overstated, and 2. Identify the type of information
liabilities and expenses are not about that phenomenon that would
understated. be most relevant.
3. Free from Error 3. Determine whether that information
- No errors or omission in the is available and whether it can
description of the phenomenon provide a faithful representation of
- The process used to produce the the economic phenomenon.
reported information has been
selected and applied with no errors If so, the process of satisfying the FQC ends
in the process at that point. If not, the process is repeated
- Doesn’t mean perfectly accurate in with the next most relevant type of
all respects information.
- Estimates should be indicated; notes
to financial statement – all Trade-off between the FQC may need to be
information should be indicated made in order to meet the objective of
- Estimates cannot be determined as financial reporting. (sacrificing one
accurate or inaccurate; but if it is qualitative example to balance)
described clearly as an estimate,
Example from Paragraph 2.22 - Intercomparability – comparing
The most relevant information about a similar information about other
phenomenon may be a highly uncertain entities
estimate. - Intracomparability – comparing
 In some cases, the level of similar information about the same
measurement uncertainty involved entity for another period or another
in making that estimate may be so date.
high that it may be questionable - It enables users to identify and
whether the estimate would provide understand similarities and
a sufficiently faithful representation differences.
of that phenomenon. - Comparison requires at least two
 In some cases, the most useful items
information may be the highly
uncertain estimate, accompanied by Consistency
a description of the estimate and an - is related to, but not the same as
explanation of the uncertainties that comparability.
affect it. - Use of the same periods for the
 In other such cases, if that same items, either from period to
information would not provide a period within a reporting entity or in
sufficiently faithful representation of a single period across entities.
that phenomenon, the most useful - Needed in order to achieve
information may include an comparability
estimate of another type that is
slightly less relevant but is subject to Uniformity
lower measurement uncertainty. - Pertains to appearances or form
- While comparability has a deeper
Module 6: Enhancing requirement, which is the substance
of the economic phenomenon.
Qualitative Characteristics of - Items may look similar but they have
Useful Financial Information to be derived using consistent
 Science – measurements, the principles or methods
detailed process and preparation
 Art – the way it should be presented Paragraph 2.27
 For information to be comparable,
Enhancing Qualitative Characteristics like things must look alike and
- Comparability different things must look different.
- Verifiability
- Timeliness 2. VERIFIABILITY
- Understandability - Verify comes from the Latin word,
“verus”, means “true”.
1. COMPARABILITY - Refer to proving the truth about
- Can enhance RELEVANCE something
 - Helps assure users that information - Some information may continue to
faithfully represents the economic be timely long after the end of a
phenomena it purports to represent. reporting period, some users need
to identify and assess trends like the
Direct Verification Wall Street Journal market trends
- Direct observation
- Example: by counting cash or 4. UNDERSTANDABILITY
watching how the physical inventory - Classifying, characterizing and
taking goes presenting information clearly and
concisely make it understandable.
Indirect Verification - Faithful representation
- Checking the inputs to a model, - The conceptual framework provides
formula, or other technique and that some phenomena are
recalculating the outputs using the inherently complex and cannot be
same methodology. made easy to understand, but if you
- Example: verifying the carrying exclude this information in an
amount of inventory by checking the attempt to make financial reports
inputs (quantities and costs) and easier to understand, then these
recalculating the ending inventory reports would be incomplete and
using the same cost flow assumption can possibly become misleading.
(FIFO Method) - Financial reports are prepared for
users who have reasonable
Forward-looking financial information knowledge of business and
- It may not be possible to verify these economic activities. With diligence,
until a future period they are also able to review and
- Necessary to disclose the underlying analyze the information.
assumptions, the methods compiling - Sometimes, users would hire
the information and other factors advisers or consultants to
and circumstances that support the understand information about
information complex economic phenomena.

3. TIMELINESS Applying the enhancing qualitative

- Must be provided on time characteristics is an iterative (repetition)
- Means having information available process that does not follow a prescribed
to decision makers in time to be order.
capable of influencing their  Sometimes, one enhancing
decisions characteristic may have to be
- Information like other commodities diminished to maximize other
should be served qualitative characteristic
- The older the information, the less  Even if the EQC are maximized,
useful it is. usefulness cannot be obtained if the
- Recent information is more financial information is irrelevant to
reflective of current events and start with or It does not faithfully
conditions
 represent what it purports to Board seeks information from
represent. providers of financial information,
users, auditors, academics, and
Cost Constraint on Useful Financial others about the expected nature
Reporting and quantity of the benefits and
Cost – pervasive constraint on the costs of that Standard. (par. 2.42)
information that can be provided by
financial reporting 
 Pervasive – widely spread
 Constraint – limitation

Paragraph 2.39
 Reporting information imposes costs
and it is important that those costs
are justified by the benefits of
reporting that information
 Several types of costs and benefits
need to be considered.

Paragraph 2.40
 Though providers of financial
information expend most of the
effort in collecting, processing,
verifying, and disseminating, but
users ultimately bear those costs
and result to reduced returns on
their part
 Users also incur costs of analyzing
and interpreting this information
 If the needed information is not
provided, additional costs would
also be incurred by users in order to
obtain this information elsewhere or
to estimate it.

In applying the cost constraint,

 The board assesses whether the
benefits of reporting particular
information are likely to justify the
costs incurred to provide and use
that information.
 When applying the cost constraint in
developing a proposed standard, the