Chapter 2: Qualitative
Characteristics of Useful
Financial Information
AGENA MARIE SAN PABLO
Qualitative Characteristics
Qualitative characteristics are the qualities or attributes that
make financial accounting information useful to the users.
Under the Conceptual Framework for Financial Reporting,
qualitative characteristics are classified into fundamental
qualitative characteristics and enhancing qualitative
characteristics.
Fundamental Qualitative Characteristics
The fundamental qualitative characteristics relate to the
content or substance of financial information.
The fundamental characteristics are relevance and faithful
representation.
Information must be both relevant and faithfully represented
if it is to be useful.
Relevance
Relevance is the capacity of the information to influence a
decision.
Information that does not bear an economic decision is
useless.
Ingredients of relevance
1. Predictive value - Financial information has predictive value
if it can be used as an input to processes employed by users
to predict future outcome.
2. Confirmatory value - Financial information has a
confirmatory value if it provides feedback about previous
evaluations.
Materiality
Information is material if omitting, misstating or obscuring it
could reasonably be expected to influence decisions that the
primary users of general purpose financial reports make on
the basis of those reports, which provide financial information
about a specific reporting entity.
Materiality concept is also known as the “doctrine of
convenience”.
Materiality
Materiality of an item depends on relative size rather than
absolute size.
The factors affecting in the determination of materiality are
the relative size and nature of an item.
Faithful Representation
Faithful representation means that financial reporrts
represent economic phenomena or transactions in words and
numbers.
Ingredients of faithful representation:
1. Completeness
2. Neutrality
3. Free from error
Completeness
A complete depiction includes all information necessary for a
user to understand the phenomenon being depicted,
including all necessary descriptions and explanations.
Completeness is the result of the adequate disclosure
standard or the principle of full disclosure.
Neutrality
A neutral depiction is without bias in the selection or presentation of
financial information.
Neutrality is supported by the exercise of prudence. Prudence is the
exercise of caution when making judgements under conditions of
uncertainty.
Conservatism is synonymous with prudence. Conservatism means that
when alternatives exist, the alternative which has the least effect on
equity should be chosen.
Free from error
Free from error means there are no errors or omissions in the
description of the phenomenon, and the process used to
produce the reported information has been selected and
applied with no errors in the process.
When monetary amounts in financial reports cannot be
observed directly and must instead be estimated,
measurement uncertainty arises.
Substance over form
If information is to represent faithfully the transactions and
other events it purports to represent, it is necessary that the
transactions and events are accounted in accordance with
their substance and reality and not merely their legal form.
Enhancing qualitative characteristics
The enhancing qualitative characteristics relate to the
presentation or form of the financial information.
The enhancing qualitative characteristics are comparability,
understandability, verifiability, and timeliness.
Comparability
Comparability is the qualitative characteristic that enables
users to identify and understand similarities in, and
differences among, items.
Comparability may be made within an entity or between and
across entities.
Consistency
Consistency, although related to comparability, is not the
same.
Consistency refers to the use of the same methods for the
same items, either from period to period within a reporting
entity or in a single period across entities.
Understandability
Understandability requires that financial information must be
comprehensible or intelligible if it is to be most useful.
Financial reports are prepared for users who have a
reasonable knowledge of business and economic activities
and who review and analyze the information deligently.
Verifiability
Verifiability means that different knowledgeable and
independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is
a faithful representation.
Types of Verification
1. Direct Verification - Direct verification means verifying an
amount or other representation through direct observation.
2. Indirect Verification - Indirect verification means checking
the inputs to a model, formula or other technique and
recalculating the outputs using the same methodology.
Timeliness
Timeliness means having information available to decision-
makers in time to be capable of influencing their decisions.
Cost constraint on useful information
Cost is a pervasive constraint on the information that can be
provided by financial reporting.
Reporting financial information imposes costs, and it is
important that those costs are justified by the benefits of
reporting that information.
