Qualitative Characteristics of Financial Information
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).
Accoding to the Conceptual Framework, financial information is useful when it is relevant and represents faithfully what it purports to represent.
The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable.
Fundamental Qualitative Characteristics
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 show what really are present and what really happened, as the case may be.
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
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 2017, 2018, and 2019. Comparability of information across entities enables analysis of similarities and differences between different companies.
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.
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.
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.