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Qualitative Characteristics of Financial Information

Financial information should have two fundamental qualitative characteristics - relevance and faithful representation. Relevant information helps users predict future outcomes and confirm past evaluations, while faithfully represented information accurately reflects what occurred without bias or error. Additionally, comparability, verifiability, timeliness, and understandability enhance the quality of financial statements by allowing comparisons over time and between entities, supporting audits, providing timely data for decisions, and presenting information clearly.

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655 views2 pages

Qualitative Characteristics of Financial Information

Financial information should have two fundamental qualitative characteristics - relevance and faithful representation. Relevant information helps users predict future outcomes and confirm past evaluations, while faithfully represented information accurately reflects what occurred without bias or error. Additionally, comparability, verifiability, timeliness, and understandability enhance the quality of financial statements by allowing comparisons over time and between entities, supporting audits, providing timely data for decisions, and presenting information clearly.

Uploaded by

Hamza AlBulushi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Qualitative Characteristics of Financial Information

accountingverse.com/financial-accounting/introduction/qualitative-characteristics.html

Introduction
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).

In a Nutshell

Fundamentally, financial statement information needs to be 1) relevant and 2) faithfully


represented. Faithful representation means that information is complete, neutral, and
free from error.
bias.

The quality of financial statements is enhanced by comparability, verifiability, timeliness,


and understandability.

Fundamental Qualitative Characteristics

1. Relevance
Relevant 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 Representation
The 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 Characteristics

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1. Comparability
Comparable 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 2018, 2019, and 2020.
Comparability of information across entities enables analysis of similarities and
differences between different companies.

2. Verifiability
Verifiability 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. Timeliness
Timeliness 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. Understandability
Understandability 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.

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