Qualitative Characteristics of FS
Attributes that make information provided in financial statements useful to users
Principal qualitative characteristics relate to:
PRESENTATION | CONTENT |
Understand ability | Relevance |
Comparability | Reliability |
Understandbility
Users must be able to understand the financial statements
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For this users are assumed to have reasonable knowledge of business and economic activities and accounting and a willingness to study information with reasonable diligence.
Information about complex matters should not be excluded on the grounds that it may be too difficult for certain users to understand.
Relevance:
The predictive and conformity role of information is interrelated. The information has the quality of relevance when it influences the economic decision making of the users by helping them:
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Evaluate past, present or future events; or
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Confirming or correcting their past evaluations
The manner of showing information will enhance the ability to make predictions, e.g. by highlighting the un-usual items.
The relevance of information is affected by its nature and materiality
ITS NATURE |
MATERIALITY |
Nature alone may be sufficient to determine relevance (e.g. remuneration of management, segmental information) |
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of financial statements. |
Nature and materiality both can be relevant e.g. the amounts of inventories held in each of the main category. |
Depends upon size of item or error judged in particular circumstances of its omission or misstatement |
Materiality is not a primary qualitative characteristic itself (like reliability or relevance) because it is merely a threshold or cult-off point |
Reliability
Users must be able to depend on it being faithful representation.
The information has the quality of reliability when: –
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F. S are free from material error and bias
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Can be depended by the users
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Reliability comprises
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Faithful representation
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Substance over form: Substance and economic reality, not merely the legal form
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Neutrality – free from biasness
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Prudence :Including a degree of caution in making estimates under conditions of un-certainty such that assets or income are not overstated and liabilities or expenses are not understated
comparability
User need to able to compare
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Fs of an enterprise through time – to identify trends in financial position and performance
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Fs of different enterprise- to evaluate financial position, performance and change in financial position.
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Consistent measurement and display of financial affect of like transactions and other events
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Implementation – users must be informed of accounting policies employed, any changes in those policies an defects of such changes
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Annual statements must show corresponding information for preceding periods.
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