Qualitative Characteristics Of Financial Information

Accounting information should be user friendly. It must me trustworthy and reliable. Materiality is also an important concept. Materiality is an aspect of relevance based on the nature or magnitude of the items to which the information relates in the context of an individual entity’s financial report.

According to the Conceptual Framework, the two fundamental qualitative characteristics of financial information are:

  1. Relevance
  2. Faithful representation.

 1. Relevance :

Paragraphs QC6 to QC11 of the IASB’s Conceptual Framework elaborate on the qualitative characteristic of relevance. Information is relevant if:

• it is capable of making a difference in the decisions made by the capital providers as users of financial information

• it has predictive value, confirmatory value or both. Predictive value occurs where the information is useful as an input into the users’ decision models and affects their expectations about the future. Confirmatory value arises where the information provides feedback that confirms or changes past or present expectations based on previous evaluations.

• it is capable of making a difference whether the users use it or not. It is not necessary that the information has actually made a difference in the past or will make a difference in the future.

 2. Faithful Representation :

Paragraphs QC12 to QC16 of the IASB’s Conceptual Framework elaborate on the concept of faithful representation.

Faithful representation is attained when the depiction of economic phenomenon is complete, neutral, and free from material error. This results in the depiction of the economic substance of the underlying transaction. Note the following in relation to these characteristics:

• A depiction is complete if it includes all information necessary for faithful representation.

• Neutrality is the absence of bias intended to attain a predetermined result. Providers of information should not influence the making of a decision or judgement to achieve a predetermined result.

• As information is provided under conditions of uncertainty and judgements must be made, there is not necessarily certainty about the information provided. It may be necessary to disclose information about the degree of uncertainty in the information in order that the disclosure attains faithful representation.

These two fundamental qualitative characteristics of financial information are important.

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