Qualitative

Characteristics of Useful
Financial Information
CONCEPTUAL FRAMEWORK AND ACCOUNTING
STANDARDS
 Qualitative Characteristics
Qualitative characteristics are the qualities or attributes that
make financial accounting information useful to the users.

Qualitative characteristics are classified into:

a. Fundamental qualitative characteristics

b. Enhancing qualitative characteristics
 Fundamental Qualitative Characteristics
Relevance and faithful representation are the fundamental
qualitative characteristics of financial information.

The fundamental qualitative characteristics relate to the

content or substance of financial information.

Information must both be relevant and faithfully represented

to be useful.
 1st. Identify an economic phenomenon or
transaction that has potential to be useful.

Application of 2nd. Identify the type of information about

Fundamental the phenomenon or transaction that
Qualitative would be most relevant and can be
Characteristics faithfully represented.
3rd. Determine whether the information is
available.
 RELEVANCE
The capacity of the information to influence a decision is the simplest description
of relevance.

To be relevant, the financial information must be capable of making a difference in

the decisions made by users.

Examples:

The statement of financial position is relevant in determining financial position, and the income statement is
relevant in determining performance.

Earnings per share information is more relevant than book value per share in determining the attractiveness
of an investment.
 Relevance - Predictive Value and Confirmatory
Value
Predictive value means that financial information can be used as an
input to processes employed by users to predict future outcome. This
means that the information can help users increase the likelihood of
correctly or accurately predicting or forecasting the outcome of events.

Confirmatory value means that the financial information provides

feedback about previous evaluations. This enables users confirm or
correct earlier expectations.
 Materiality
Materiality is a practical concept in accounting which dictates that
strict adherence to GAAP is not required when the items are not
significant enough to evaluation, decision and fairness of financial
statements.
Doctrine of Convenience
The relevance of information is affected by its nature and materiality.
 Materiality
Materiality of an item depends on relative size rather than absolute
size. What is material for one entity may be immaterial for another.

As a general rule an item is material if knowledge of it could

reasonably affect or influence the economic decisions of the primary
users of the financial statements.
 Materiality
IASB DEFINITION OF MATERIALITY
Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence the economic decisions that primary users of general purpose financial statements make
on the basis of those statements which provide financial information about a specific reporting
entity.

Three important aspect in the definition:

- Could reasonably expected to influence

- Obscuring information
- Primary users
 FAITHFUL REPRESENTATION
Faithful representation means that financial reports represents
economic phenomena or transactions in works or in numbers.

Faithful representation means that the actual effects of the

transactions shall be properly accounted for and reported in the
financial statements.
 FAITHFUL REPRESENTATION
Three characteristics of faithful representation:

1. Completeness
2. Neutrality
3. Free from error
 Completeness
Completeness requires that relevant information should be presented in a way that facilitates
understanding and avoid erroneous implications.

A complete depiction includes all information necessary for a user to understand the
phenomenon or transactions being depicted, including all necessary description and explanation.

The PFRS requires that the financial statements shall be accompanied by the notes to financial
statements. The notes provides the necessary disclosures required.
 Completeness
The standard of adequate disclosure means that all significant and relevant information leading to
the preparation of the financial statements shall be clearly reported.

An accountant shall disclose a material fact known to him which is not disclosed in the financial
statements but disclosure of which is necessary in order that the financial statements would not
be misleading.
 Neutrality
The standard of adequate disclosure means that all significant and relevant
information leading to the preparation of the financial statements shall be clearly
reported.

An accountant shall disclose a material fact known to him which is not disclosed
in the financial statements but disclosure of which is necessary in order that the
financial statements would not be misleading.

PRINCIPLE OF FAIRNESS
 Neutrality
Prudence. The exercise of care and caution when dealing with the
uncertainties of measurement process such that assets or income are
not overstated and liabilities and expenses are not understated.

Conservatism. This means that when alternatives exists, the

alternative which has the least effect on equity is chosen.

“Anticipate no profit and provide for probable and measurable loss.”

 Free from Error
Free from error means that there are no errors or omissions in the
description of the phenomenon or transactions.

- Measurement uncertainty
- Substance over form
 Activity
Provide the enhancing qualitative characteristics of financial
information.