The two fundamental qualitative characteristics of financial reports are relevance and faithful representation. The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability. Fundamental qualitative characteristics: Enhancing qualitative characteristics: References: Tommy Andrian, S.E., M.Ak, Cert.DA. May 12, 2022 May 12, 2022/ Steven Bragg In order to be useful to a user, accounting information should have the following characteristics: Prepared objectively. The accountant should record and report on accounting transactions from a neutral perspective, without any bias that would give the reader an incorrect impression about the financial position, results, or cash flows of a business. Consistency of recordation and presentation. A particularly important characteristic is for the accountant to record information using a consistent application of accounting standards, and to present aggregated results in the same way, for all periods presented. In support of decisions. An experienced accountant will prepare financial reports that provide the specific information needed by management to reach a decision. That is, the accountant does not just issue the same boilerplate reports, month after month. It may also be necessary to create new reports that deal with new situations confronting a business. Matches reader knowledge. The accountant should prepare reports that are tailored to the knowledge of the reader. Thus, a short address at a shareholders meeting may call for an aggregated presentation of just a few key performance metrics, while a presentation to an institutional investor may call for a considerably more detailed report. Reliability and completeness of information. There should be an accounting system in place that is comprehensive enough to be able to routinely collect, record, and aggregate all transactions, so that users of the accounting information are assured that they are reading about the complete results of a business. This also means that there are no "surprises" that appear as retroactive adjustments to the financial statements. It can be useful to examine all of the reports issued by the accounting department to see if they adhere to the preceding list of characteristics. If not, consider upgrading the sources of information, altering the reports to exclude the less useful items, or eliminating reports entirely. This review should be scheduled to recur, preferably no less than on an annual basis. It can be interesting to see what types of information crept into the reports since the last review that do not meet the preceding standards, and determine why the information was added. May 12, 2022/ Steven Bragg/ There are some qualities of accounting that make it useful for both external and internal users of accounting. Without these qualities accounting information wouldn’t be clear and an orderly view of the business would not be visible. 4 qualitative characteristics of accounting information are; Comparison is a very important part of financial information as it helps the users of accounting information to differentiate, analyze, improve, and take important decisions. The ability to do intra-firm comparisons (within the same company), inter-firm comparisons (with other companies), and market sector comparisons (comparison within the same market sector) make accounting information easy to work with. Example of Comparability – QoQ (Quarter on Quarter) & YoY (Year on Year comparisons) should be possible with the accounting information. UnderstandabilityThe presentation of accounting information should be simple and understandable for the users of the information. It is important that all the data is clear and concise, it can be easily understood by everyone including parties who are not from an accounting background. All relevant explanatory notes should be provided along with the financial statements. Method of valuation of inventory, method of depreciation, information on reserves and surplus, contingent liabilities, and any other extraordinary items. Example of Understandability – It should be possible for bankers, investors, employees, etc. to understand the financial information of the business. ReliabilityOne of the most important qualitative characteristics of accounting information is the reliability of data, i.e. all information provided must be traceable and verifiable with proper source documents. In case of an internal or an external audit, the information inside financial statements should be confirmable back to its original source. Failure of an audit may lead to disbelief in the company’s financial data. Example of Reliability – An auditor must be able to verify a transaction back to its origin with the help of invoices, memos, purchase orders, sales orders, etc. RelevanceRelevance of accounting information means it should help the user of information with their decision-making process. The information provided should not be irrelevant and unnecessary. All information should be capable of monetary computation. Example of Relevance – A firm is expected to provide the total amount owed by the debtors on the balance sheet, whereas the total number of debtors is not important. Short Quiz for Self-EvaluationWant to re-attempt? - “Refresh” this page. Check out more content on our site :) Subscribed? - Check your mailbox Thank You! We faced problems while connecting to the server or receiving data from the server. Please wait for a few seconds and try again. If the problem persists, then check your internet connectivity. 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Discover the qualities of accounting information such as relevance, reliability, comparability and consistency. 1. Qualitative characteristics of accounting informationThere are four (4) qualitative characteristics of accounting information that serve as the basis for decision making purposes in accounting:
These qualities make accounting information understandable and useful for decision and reporting purposes: the goal of financial reporting is to provide useful information to current and potential investors, creditors, and other users of accounting information (e.g., government, standard-setting bodies) to make investment, credit, and other decisions. Accounting information qualitative characteristics are summarized below:  In addition to the aforementioned characteristics (i.e., relevance, reliability, comparability, and consistency), the following qualities of accounting information affect its usefulness: understandability, materiality, and conservatism. Understandability allows the users of accounting information to comprehend (understand) accounting information, given they spend the necessary time. Materiality refers to a relative significance or importance of an item - dependent on individual’s judgment - to the overall financial condition of a company. Information materiality and cost-benefit relationship (i.e., whether information benefits outweigh its costs) impose constraints on the usefulness of accounting information. Conservatism (i.e., accounting practice of prudence when there is business uncertainty) can also affect the usefulness of accounting information. To learn more about materiality and conservatism, read this accounting article.
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What are the four main qualitative characteristics that influence the usefulness of accounting information?
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