Is accounting just number after number or is it more than that? Lets have a look.
I’m Thomas Harwood and Welcome to The Accounting Student, where we create free and short videos
so that you can learn about accounting.
Today’s video is looking at what are the qualitative characteristics of financial information.
If the accounting information of an entity was only quantitative i.e. just numbers; then
to someone who has not studied accounting may find the information impractical and confusing.
That is why The Framework for the Preparation and Presentation of Financial Statements,
issued in 1989, came up with seven sections for accounting standards.
One section, called qualitative characteristics of financial statements, is very important
to the topic we are talking about in this video.
Since the section was issued it has influenced more qualitative characteristics to be included
in the financial statements of an entity and this has made the statements more useful to
the users in recent times.
The section has four main characteristics, which are, understandability, relevance, reliability
and comparability.
The first characteristic is understandability.
The users should be able to understand the information presented in the financial statements
with little or no difficulty.
Also information of complex situations related to an entity should be included because of
its relevance to potential economic decisions made by users.
Certain information should not be excluded in the statements even if the entity thinks
that some of the users may find it too difficult to understand.
The next characteristic is relevance.
The information must be relevant for the users to be able to make decisions. Users should
be able to evaluate past, present and future events or confirm or amend their past evaluations.
Relevance also considers the information to be accurate, neutral, i.e. not bias, prudent
and complete.
The next characteristic is reliability.
The information should be free from error and bias.
The information should not be misleading and faithfully represent transactions and other
activities of an entity.
The final characteristic is comparability.
The information should be presented in a way that the users are able to compare the financial
information from different periods of an entity.
This is to help the users identify trends in the performance as well as the financial
position of an entity.
Although the qualitative characteristics have helped the financial information be more useful
to the users, it also has some constraints.
One is timeliness; if there is an unexpected publication in reporting the financial information
of an entity then the information itself may not be relevant or reliable for the users.
Another constraint is the balance between the benefits and the costs.
The benefits of qualitative characteristics should outweigh the cost of obtaining them.
If costs are more than the benefits then an entity may decide not to provide the qualitative
characteristics which are difficult to obtain.
Another constraint is the balance between the characteristics themselves. In some cases,
a conflict may happen between the characteristics. Therefore a trade off may happen to allow
the objective of the financial statements to be met.
The final constraint is a true and fair view or fair presentation.
The Framework for the Preparation and Presentation of the Financial Statements does not mention
how an entity should present the characteristics fairly.
So that was the explanation of qualitative characteristics of financial information.
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