Syllabus B. The Financial Reporting Framework B1. The Applications Of An Accounting Framework

B1c. The Qualitative Characteristics Of Useful Financial Information 4 / 17

Syllabus B1c)

Discuss the nature of the qualitative characteristics of useful financial information.

Chapter 2: Qualitative Characteristics of Useful Financial Information

Qualitative characteristics of useful information

Financial information is useful when:

  1. It is relevant and

  2. Represents faithfully what it purports to represent.

We call these fundamental characteristics of good information

The usefulness of financial information is enhanced if it is:
  1. Comparable

  2. Verifiable

  3. Timely and

  4. Understandable

Fundamental characteristics:

  1. Relevance

    Relevant financial information is capable of making a difference in the decisions made by users. 

    Meaning it has predictive value, confirmatory value, or both.

    Materiality is an entity-specific aspect of relevance

  2. Faithful representation

    General purpose financial reports represent economic phenomena in words and numbers.  

    Faithful representation means representation of the substance of an economic phenomenon instead of representation of its legal form only.

    A faithful representation seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error.

    A neutral depiction is supported by the exercise of prudence.

Enhancing characteristics:

Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information (that is already relevant and faithfully represented)

  1. Comparability (including consistency)

    Information about a reporting entity is more useful if it can be compared with a similar information about other entities and with similar information about the same entity for another period or another date. 

    Comparability enables users to identify and understand similarities in, and differences among, items.

  2. Timeliness

    Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions.

  3. Verifiability

    Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent. 

    Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

  4. Understandability

    Classifying, characterising and presenting information clearly and concisely makes it understandable.

    While some phenomena are inherently complex and cannot be made easy to understand, to exclude such information would make financial reports incomplete and potentially misleading.

    Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information with diligence.