Qualitative Characteristics of Useful Financial Information
Qualitative Characteristics of Useful Financial Information
The purpose of financial reporting is to provide decision makers with useful information. When accounting choices are to be made by individuals, those choices should be based upon the usefulness of that information to the decision making process. The Framework identifies six qualitative characteristics of financial statements as follows:-
• relevance;
• faithful representation;
• comparability;
• verifiability;
• timeliness; and
• understandability. The first two characteristics are fundamental characteristics; and the latter four are enhancing characteristics, which are complimentary to the fundamental characteristics.
1 Fundamental Characteristics – Relevance
To be relevant, accounting information must be capable of making a difference in a decision. Information with no bearing on a decision is irrelevant. Financial information is capable of making a difference when it has predictive value, confirmatory value, or both.
Financial information has predictive value if it has value as input to predictive processes used by investors to form their own expectations about the future. For example, if potential investors are interested in purchasing shares in RSB, they may analyse its current resources and claims to those resources, its dividend payments, and its past performance to predict the amount, timing and uncertainty of RSB’s future cash flows.
Relevant information also helps users confirming or correcting past evaluations they have made (confirmative value). For example, when RSB issues its year-end financial statements, it confirms or changes past (or present) expectations based on previous evaluations. The predictive and confirmatory roles of information are interrelated. For example, information about the current level and structure of RSB’s assets and liabilities helps users in predicting its ability to take advantage of opportunities and react to adverse situations. The
The purpose of financial reporting is to provide decision makers with useful information. When accounting choices are to be made by individuals, those choices should be based upon the usefulness of that information to the decision making process. The Framework identifies six qualitative characteristics of financial statements as follows:-
• relevance;
• faithful representation;
• comparability;
• verifiability;
• timeliness; and
• understandability. The first two characteristics are fundamental characteristics; and the latter four are enhancing characteristics, which are complimentary to the fundamental characteristics.
1 Fundamental Characteristics – Relevance
To be relevant, accounting information must be capable of making a difference in a decision. Information with no bearing on a decision is irrelevant. Financial information is capable of making a difference when it has predictive value, confirmatory value, or both.
Financial information has predictive value if it has value as input to predictive processes used by investors to form their own expectations about the future. For example, if potential investors are interested in purchasing shares in RSB, they may analyse its current resources and claims to those resources, its dividend payments, and its past performance to predict the amount, timing and uncertainty of RSB’s future cash flows.
Relevant information also helps users confirming or correcting past evaluations they have made (confirmative value). For example, when RSB issues its year-end financial statements, it confirms or changes past (or present) expectations based on previous evaluations. The predictive and confirmatory roles of information are interrelated. For example, information about the current level and structure of RSB’s assets and liabilities helps users in predicting its ability to take advantage of opportunities and react to adverse situations. The