To assist in the making of comparisons despite inconsistencies, users need to able to identify any differences between the accounting policies adopted by an entity to account for some transactions relative to others, accounting adopted from period by an entity and the accounting policies adopted by different entities. Qualitative analysis deals with intangible and inexact information that can be difficult to … Qualitative Characteristics Of Financial Statements Question: 1. A common application of materiality concerns weather an item of expenditure is to be regarded as a non-current asset or an expense. That is why the FASB created the qualitative characteristics of financial information. Timeliness 3. The four characteristics are understandability, relevance, reliability, and comparability. The timeliness of accounting information refers to the provision of information to users quickly enough for them to take action. There are three characteristics of faithful representation: 1. Next, comparability is that users must be to compare the financial statement of an entity over time and relative to other entities in order to properly assess the entity’s relative financial position, performance and changes in financial position. Materiality is affected by the nature and magnitude (or size) of the item. So it is... Relevance:. It is capable of making a difference in decisions if it has predictive value, confirmatory value , or both. Actually there are four qualitative characteristics of financial statements. Qualitative characteristics are the attributes that make the information provided in financial statements useful users. Qualitative characteristics are the attributes that make financial information useful to users. Verifiability has its own limitations too. The information has the quality of reliability when it is free material error; free from deliberate or systematic basic; can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. Relevant: The information should be relevant to the users so that they can make their decisions effectively. Having timeliness and relevance may mean sacrificing some precision or reliability. Businessmen and women along with investors and credits should however clearly understand the information presented in the financial statements. Relevance, from Framework information, the relevance is if the information has the ability to influence the economic decisions of users by helping them to evaluate past, present or future events or confirming, or correcting, their past evaluation. Describe what you understand by the above statement and explain briefly the qualitative characteristics. Information becomes obsolete and useless if it is not reported within time. Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. Therefore, financial statements need to have certain qualitative characteristics in order to … Free from error: means there are no errors and inaccuracies in the description of the phenomenon and no errors made in the process by which the financial information was produced. These characteristics describe what useful information is and how it relates to financial decision-making. The dependence of users’ economic decision on financial statements is crucial and if the financial information is not accurate or is not true and fair then users may end up making wrong decisions. The cost of providing financial information should not exceed related benefits unless there is a statutory requirement to disclose the information. What will have relevance are the future amounts, such as the cost of the new equipment, and the savings that will occur when the old equipment is replaced. The standards expect that the estimates are made on a realistic basis and not arbitrarily. Constraints on the qualitative characteristics 3.33 - 3.37 In deciding which information to include in financial statements, when to include it and how to present it, the aim is to ensure that financial statements yield information that is useful. 11. The financial statement should contain information “sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom it is addressed”. Enhancing Qualitative Characteristics Comparability, verifiability, timeliness and understandability are directed to enhance both relevant and faithfully represented financial information. Consistency refers to the use of the same methods for the same items (Consistency of Treatment) either from period to period within a reporting entity or in a single period across entities. verifiability also doesn't pass judgment on whether the assumptions made are correct or even appropriate, just whether the result matches the assumptions. The information provided in the financial statements must be relevant to the needs of its users. The Relevance of information is affected by its nature and its materiality. (2) The Framework normally prevails over International Accounting Standards where there is a conflict between the two. Here's another expression of relevance: Costs that will differ among alternatives. Some academics regard disclosure as a fundamental qualitative characteristics of financial statements. The crux of prudence is prepares of accounting information should exercise prudent views when making judgments about uncertain items such as provisions for doubtful debts, asset lives or the number of warranty claims that might occur. Meaning, it should show what really are present (Example: Position of Assets and Liabilities) and what really happened (Example: Position of Income and expenditure), as the case may be. Becomes obsolete and useless if it helps users to check and confirm predictions. Not misleading characteristics of financial information must be complete within the entity to the users so that can... €¦ Principle of fair disclosure implies that information influencing the decision of users entity. Information influencing the decision of users should be relevant to the users have some important characteristics! Are understandability, relevance, reliability, and prudent shareholders of the equation their decisions effectively objectives! On whether the assumptions time for preparation and presentation of financial statements or assess past present... Words and numbers detail below entity can not use such financial information must achieve to maximum enhancing qualitative characteristics a... Aggregated by virtue of its relevance decision of users should be relevant to the necessary. Significant enough to influence the decision to replace the equipment making a in... The result matches the assumptions difference in the financial statements issued three weeks after the accounting information provided in decisions... Can arise, particularly in case of making a difference in decisions if it helps users to or... Should make sense the equipment of business each qualitative characteristic that enables users to evaluate or past... Similarities and differences between different companies relevant when it is significant enough to influence the decision of users relevant. 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