To be useful for decision making, information should possess the primary qualities of relevance and
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Most organizations devote a fair amount of time and effort to considering their goals and objectives. The accounting profession is no different. Foremost among the objectives of accounting and reporting is to provide useful information for investors, creditors, analysts, governments, and others. Accounting information is general purpose and should be designed to serve the information needs of all types of interested parties. To be useful, information should be helpful in assessing an entity’s economic resources, claims against resources, and what causes changes in resources and claims. Such assessments are generally benefited by accrual accounting, coupled with consideration of cash flows. Care must be taken to differentiate between resource changes resulting from economic performance and other factors (e.g., earnings vs. issuing additional shares of stock). The following qualities help to make accounting useful.
Be aware of the growing complaint that accounting has become too complex. Many persons within and outside the profession protest the ever growing number of rules and their level of detail. The debate is generally couched under the heading “principles versus rules.” Advocates of a principles-based approach argue that general concepts should guide the judgment of individual accountants. Others argue that the world is quite complex, and accounting must necessarily be rules-based. They believe that reliance on individual judgment may lead to wide disparities in reports that could render meaningful comparisons impossible.
Principlesofaccounting.com ™ Copyright © 2022. All rights reserved. This article relates to the outcome of the FA2 syllabus ‘Explain generally accepted accounting principles and concepts’ and has been written to complement the FA2 article titled ‘A matter of principle’ (see 'Related links'). The focus for this article is on qualitative accounting characteristics rather than principles of accounting. What are the qualitative characteristics?The Conceptual Framework for Financial Reporting (the Conceptual Framework) identifies two fundamental qualitative characteristics and four enhancing qualitative characteristics relating to useful financial information: Fundamental qualitative characteristics
Enhancing qualitative characteristics
Financial reports include financial information and, when preparing these reports, consideration should be given to the type of information that is likely to be most useful to existing and potential investors, lenders and other creditors for making decisions about the reporting entity. If financial information is to be useful then it must be relevant and must also faithfully represent what is being reported. The usefulness of this information is enhanced if it is comparable, verifiable, timely and understandable. Each of these qualitative characteristics will be considered below. Fundamental qualitative characteristicsRelevance
Predictive value means that the information can be used to predict future outcomes. The financial information itself does not need to be a prediction or a forecast, but can be interpreted by users to allow them to make their own predictions. 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. More information on materiality can be found in the article ‘A matter of principle’. Faithful representation An entity’s financial report represents such economic phenomena in words and numbers. 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. Being ‘free from error’ does not mean that the information needs to be perfectly accurate. 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. Although it may not be 100% accurate, such an estimate might still be faithfully represented as long as the amount is described clearly and accurately as being an estimate, the limitations of the estimating process are explained, and no errors were made in selecting and applying an appropriate process used for developing the estimate. Enhancing qualitative characteristicsComparability Verifiability Timeliness Understandability SummaryCandidates must have knowledge of the fundamental and enhancing qualitative characteristics. Further, by ensuring that the key points of each of these qualitative characteristics are understood, candidates should be better prepared to answer questions that might arise in the exam. Written by a member of the FA2 examining team What are the two characteristics of relevant information?Relevance refers to how helpful the information is for financial decision-making processes. For accounting information to be relevant, it must possess: Confirmatory value – Provides information about past events. Predictive value – Provides predictive power regarding possible future events.
What characteristics define information that is important to decision makers?Relevance and reliability are the two primary qualities that make the accounting information useful for decision making.
What are the qualities of a good accounting information?There are six different types of qualitative characteristics of accounting information, including:. Relevance. ... . Representational faithfulness. ... . Verifiability. ... . Understandability. ... . Comparability. ... . Timeliness. ... . Extract relevant information. ... . Check your information.. What are the two main qualitative characteristics of useful financial information?The two fundamental Qualitative characteristics are : Relevance. Faithful Representation.
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