FA - The Qualitative Characteristics

of Financial Information
Contents
THE CHARACTERISTICS OF FINANCIAL INFORMATION: .............................................................. 2
ACCOUNTING CONCEPTS: ........................................................................................................... 3

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Data and information are often used interchangeably but there is a difference.

 Data are the facts and figures collected. They are the raw material for information to
be made from.

 Information is the data processed and presented highlighting trends and patterns.

For example, the number of ice creams sold by a shop is data, but when compiled together into
a sales report it is information.

THE CHARACTERISTICS OF FINANCIAL INFORMATION:

1. Relevance: Financial information must be relevant to the needs of the users. For
example, a sales report detailing the sales revenues in the last financial period will
not be relevant to the purchasing manager. A report detailing the current
inventories and quantities sold in the past month is relevant.

Relevance also means that the information highlights important data that will
influence economic decisions. Financial information influences the economic
decisions of its users and it must show all the relevant data. If important data is left
out it will affect decisions made.

2. Faithful representation of financial information: This means that the information

accurately reflects the condition of the business. For example, if profits are falling,
the profit and loss should reflect this, even if it is not what the shareholders want to
hear.

3. Comparability: This means the information must be comparable to other periods

and departments so trends can be identified and the financial position of the
company can be compared with its competitors. For example, if the sales of a
company were presented one month in units sold, and the next month as revenues,
it would be difficult to compare the performance.

4. Verifiability: Financial information is verifiable. This means that it is true and

accurate. If the same data was given to an independent accountant, they would
produce the same information.

5. Timeliness: This means financial information should be presented in a timely

manner when the users need it to make their decisions. For example, if the
purchasing manager makes a purchase order every Wednesday at 2 o’clock, it is

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 important that they receive the previous week’s sales report and inventory reports
before then.

6. Understandability: Financial information must be understood by its users. There is

no point in a report that nobody can understand. Reports should be clearly laid out
and presented with footnotes providing more information and to help clarification.

ACCOUNTING CONCEPTS:
A. Materiality: This relates to the significance of transactions, balances and errors that are in
the financial information. The IASB framework gives an indication of what is or isn’t material
by saying:

"Information is material if its omission or misstatement could influence the economic

decisions of users taken on the basis of the financial statements." (IASB Framework)

Example:

The materiality concept gives us a cut-off point where financial information becomes
relevant. Materiality is relative to the size and individual circumstances of a company. For
example, a large multinational may not view a $300 error the same way a small shop or
market stall would.

Materiality is linked with reliability, and true and fair view. If the omission of this data will
compromise the true and fair view, it is material and must be included.

B. Substance over form: This concept means that the economic substance of a transaction
should be recorded in the financial statements, and not just their legal form. This protects
the true and fair view of accounts.

Example:

When preparing the financial statements, you must ask: "What is the underlying
transaction?” For example, consider a company that has leased a car and does not own the
car until it has finished paying an agreed 36 monthly installments. The company must
however cover all the expenses associated with ownership, like repairs and maintenance.
The legal form of this transaction is that the company does not own the car and it should
not be recorded in the accounts. However, the substance of the transaction is that the
company has full use of the car and incurs all the risks and responsibilities of ownership.

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In this situation, we look at the economic reality. Not recording the leased asset would mean
that the financial statements are not telling the full story. Therefore, the asset and the liability
should be recorded in the financial statements. For further guidance on leases see IAS 17.

C. Going concern: Under the going concern assumption, the business is viewed as continuing
for the foreseeable future. IAS 1 defines the future as 12 months from the reporting date.
Financial statements prepared on this basis assume that the organisation does not intend to
liquidate or reduce its operations. If the management decide that the business cannot
continue, the financial statements should not be prepared on the going concern basis.
Instead they are prepared on the “break-up” basis.

D. The business entity concept: This concept sets out that the business is separate from its
owners. Financial statements of a business should only contain the business’s expenses, and
not the personal ones of the owners. This is also why owners’ equity is shown as a liability in
the balance sheet, because the business owes it to the owners.

E. The accruals concept: This is a very important concept in accounting. This principle states
expenses must be recorded when they are incurred, and not when they are paid. The same
for revenues that they are recorded when the sale is agreed, not when the money is
received. An accrual is an expense for which no invoice has been received. As there is no
invoice, the final price is not known, so it is estimated.

Example:

Utility bills are one of the most common accruals. The business is using electricity, yet the
bill is received quarterly and not received on time for the year end accounts. The
accountant estimates the cost as an accrual to recognise the cost. Without the accrual, the
information would be misleading. The company’s electricity cost would not be complete.
When the final bill is received, the accrual is reversed out and the actual bill entered into
the accounts. There may be small differences, but these are usually immaterial.

F. The fair presentation concept: The financial statements must "present fairly" the financial
position, financial performance and cash flows of an entity.

Fair presentation requires the faithful representation of the effects of transactions, other
events, and conditions. This concept may require additional disclosures in the accounts to
give a fair presentation of the financial information.

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G. The consistency concept: This concept states that once an accounting principle is adopted it
should be applied consistently year on year. This enables comparisons to be made between
years.

This is particularly relevant when selecting an inventory valuation method, as different

methods can offer different valuations. If the valuation changed every year, the users of the
financial statements would not be able to compare them. It could also mean the financial
statements are not true and fair, especially if the change in valuation method is not
documented. If the accounting principle or method is changed, which should not happen
regularly, this change and the reasons for it, must be documented in the financial
statements.