qualitative characteristics of financial information
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Qualitative characteristics of financial information

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The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability. Qualitative Characteristics of Financial Reports. Fundamental qualitative characteristics: Relevance The characteristic of relevance implies that the information should have predictive and confirmatory value for users in making and evaluating economic decisions. The relevance of information is affected by its nature and materiality.

Information is material if omitting it or misstating it could influence decision making. A financial report should include all information which is material to a particular entity. Faithful representation The characteristic of faithful representation implies that financial information faithfully represents the phenomena it purports to represent. This depiction implies that the financial information is complete, neutral and free from error. Relevance is including having predictive value and confirmatory value.

Next, Reliability is including faithful representation, being natural, free form material error, complete, and prudent. Comparability is including consistency and disclosure. All the characteristics are attributes that make the information provided in financial statements are useful to users. According to the Framework, the information provided by financial statements needs to be readily understandable by users, it also means that users need to be able to perceive its significance.

Besides that, those preparing financial statements are entitled to assume that users have a reasonable knowledge of business, economic activities and accounting and a willingness to study with reasonable diligence the information provided. To aid understandability, financial information is aggregated and classified according to standard disclosure formats which are the income statement and statement of financial position. To provide a list of all the balances would be meaningless to users.

For example, the benefit of providing a list of all the credit customer balances at the yearend limited, whereas a total figure for all the trade receivables does provide information that can be of use to users. They can compare the trade receivables in current year to those last year. This will give some indication as to how credit management has changed over time. Relevance , from Framework information, the relevance is if the information has the ability to influence the economic decisions of users by helping them to evaluate past, present or future events or confirming, or correcting, their past evaluation.

Therefore, information should have predictive value or confirmatory value. Information has predictive value if it helps users to evaluate or assess past, present or future events. To have prediction value, information need not be in the form of an explicit forecast. However, the ability to make predictions form financial statements is enhanced by the manner in which the information on the past is presented. In additional, transaction newly acquired business, or business that are being disposed of, are reanalyzed and separately disclosed from transactions from continuing operations.

Therefore, a diligent user can determine changes in the performance and financial position of the entity that resulted from normal activities that are expected to continue into the future. Information has confirmatory value if it helps users to confirm or correct their past evaluations and assessments.

Relevant information can be more relevant when it is provided in a timely manner as it is more likely to influence decision-making. Materiality which included in relevance, it is an underlying accounting concept. The relevance information is affected by its nature and materiality.

A common application of materiality concerns weather an item of expenditure is to be regarded as a non-current asset or an expense. Another common application of materiality relates to separate disclosure of certain items in financial managements. Users are unable to assimilate large amounts of detailed information. This necessitates considerable aggregation of data. Materiality provides guidance on what transactions are to be aggregated by virtue of its specifying which items should be disclosed separately.

Reliability is to be useful, information must also be reliable.

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Qualitative characteristics of financial information The study recommends training of accounting personnel on IFRS and more research studies in this area. Academy of Management Qualitative characteristics of financial information, 24 : Relevance Financial information is relevant if it is capable of making a difference in the decisions made by users of that information. Such information can make a difference if it has: predictive value confirmatory value, or both. The relevance information is affected by its nature and materiality.
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Mmcis forex rub Actually there are four qualitative characteristics of financial statements. Above all, it provides only an indirect measure of financial reporting quality. Journal of Accounting and Economics, 38 3 : The Balance Sheet. Therefore, prior studies have operationalised the qualitative characteristics in line with this categorization.
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For example, current year revenue information could be used as the basis to predict revenue in future years. Confirmatory value means that the information provides feedback on previous evaluations ie it allows users to confirm or change their opinion on such evaluations.

For example, the same current year revenue information indicated above could be compared with revenue predictions which had been made in prior years to correct or improve processes that were used to make those previous predictions. As you can see, the predictive value and confirmatory value of financial information are interrelated. Determining whether financial information is relevant involves considering materiality. As well as being relevant, the substance of these phenomena must be faithfully represented.

The Conceptual Framework identifies that to be a perfectly faithful representation, a depiction of any economic phenomena would need to be:. Although such perfection is rarely if ever achievable, faithful representation requires that the above qualities should be maximised to the extent possible. For information to be complete it must include all information necessary for a user to understand it.

Neutrality means that there is no bias in the selection or presentation of financial information. Rather, that there are no errors or omissions in the depiction of any phenomena and that the processes used to produce the reported information have been selected and applied with no errors in the process. For example, in some circumstances an estimate could be used in determining financial information.

Comparability Users of financial information make decisions between alternative courses of action. For example, whether to sell or hold an investment in the shares of a company. Therefore, financial information is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or date.

Verifiability When information can be verified, it gives assurance that the information faithfully represents the economic phenomena being represented. For information to be verifiable, it means that different knowledgeable and independent parties could reach consensus although not necessarily complete agreement that a particular depiction is a faithful representation. Timeliness In general, the sooner information is available, the more useful it is.

Although some information may continue to be timely for a long time for example, information used to identify and assess trends , newer information is usually more useful than older information. Understandability Classifying, characterising and presenting information clearly and concisely makes it understandable.

Some information required for financial reports is inherently complex and, although leaving such information out may make financial reports seem easier to understand, it would also make them incomplete. This ultimately does not aid understandability. Financial reports are intended for use by users with a reasonable knowledge and the Conceptual Framework accepts that even knowledgeable users may need to seek advice to aid their understanding of more complex issues.

Candidates must have knowledge of the fundamental and enhancing qualitative characteristics. Enhancing qualitative characteristics are additional benefit added to the fundamental to enhance the decision usefulness of financial information. Enhancing qualitative characteristics provide additional benefit and usefulness in the financial reporting information.

Therefore, the four important characteristics which are comparability, verifiability, timeliness and understandability should be extent widely. However, the enhancing qualitative characteristics will be useless if the financial information is irrelevant or not faithfully represented in fundamental step. The application of the enhancing qualitative characteristics is redundant process that does not follow priority and prescribed order.

Sometimes, one or some of the enhancing qualitative characteristics will be given up to maximize the usefulness of another qualitative characteristic. If such situation happened, appropriate information or evidence should be disclosed. Materiality is said to be one of the pervasive constraint on financial reporting because it attribute to all the qualitative characteristics. For example, materiality need to be measured when determine the sufficiency of relevant information and sufficiency of complete, neutral, and free from error to faithfully represent in financial reporting.

Application of the cost constraint in financial reporting included evaluate whether the benefits of reporting information will be able to impose the costs. It is necessary to reflect on whether one or some qualitative characteristics one or some of the enhancing qualitative characteristics will be given up to reduce the cost.

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The Qualitative Characteristics of Useful Information 2010

The two fundamental qualitative characteristics of financial reports are. auri.jashe.xyz › /10/01 › qualitative-characteristics-of-financi. The qualitative characteristics of financial statements include understandability, relevance, reliability, and comparability.