Main Qualitative Characteristics Of Financial Statement

November 10th, 2006 Comments off
Share |

UNDERSTANDABLE & USEFUL

  • Accounting information should be readily understandable to the intended users of the information.

  • This is a function of both the intended users and the intended uses of the information. Accounting systems that define either the users or uses narrowly may justify more complex information requirements and standards. Accounting systems that envision a broad body of users and/or uses would tend towards less complexity in published information and standards.

  • Typically the belief that, for information to be understandable, information contained in the various financial disclosures and reporting must be transparent (i.e., clearly disclosed and readily discernable).

 

RELEVANT

The information should be relevant to the decision-making users of the information. It should make a difference in their decisions. Typically, this means the information must

be:

  • Timely
  • Have predictive value
  • Provide useful feedback on past decisions

RELIABLE

The information should be reliable and dependable. This usually includes the concepts of:

  • Representational faithfulness – the information represents what it claims to represent. For example, if the reported value of a common stock holding purports to be the current market value, that value should be approximately what the stock could be sold for by the company holding it.

  • Verifiability – another person or entity should be able to recreate the reported value using the same information that the reporting entity had.

  • Completeness – the reported information should not be missing a material fact or consideration that would make the reported information misleading.

  • The concept of neutrality is sometimes incorporated into the concept of reliability.

 

COMPARABLE AND CONSISTENT

  • For accounting information to be usable, it must allow for comparisons across time and across competing interests (such as competing companies or industries).

 

  • This leads to a need for some consistency, wherever such comparisons are to be expected. For example, comparisons of two companies would be very difficult and potentially misleading if one discounts all its liabilities while the other discounts none of its liabilities.

UNBIASED

  • Information that is biased can be misleading.

  • Biased information is not useful unless the users understand the bias, any bias is consistently applied across years/firms/industries, and  the users can adjust the reported results to reflect their own desired bias.

  • When faced with uncertainty, there is a need to either require reporting of unbiased values accompanied with sufficient disclosure, or require the reporting of biased (prudent or œconservative) values with the bias determined in a predictable, consistent fashion.

 

COST-BENEFIT EFFECTIVE

  • General understanding that the development of accounting information consumes resources.

 

  • As such, the cost of producing such information should be reasonable in relation to the expected benefit.

 

  • Use the materiality  accounting rule – may not have to be fully followed for immaterial items if full compliance would result in unwarranted higher costs.

 

Comments are closed now.

Financial Accounting

 
 

Advertise Here | Brain Teasers/Puzzles | Greeting Cards | Inspirational Quotes | Jokes/Humor | Useful Links | Motivational Stories | Resource | Shopping | Share/Express Your Views | Testimonials | Universities/Colleges | Words of Wisdom from Religions | FREE POSTING OF ACCOUNTING & FINANCE JOBS VACANCY|