1.6 Qualitative Characteristics of Useful Financial Information Flashcards
Identify the 2 fundamental qualitative characteristics
- relevance
- faithful representation
Define relevance
HINT: Relevance Predicts or Confirms Materiality
- makes a difference in user decisions
- must have predictive value, confirmatory value or both
When is information considered to have predictive value?
if it can be used as an input in a predictive process
When is information considered to have confirmatory value?
if it provides feedback that confirms or changes (corrects) prior evaluations
Define materiality
omission or misstatement can influence user decisions based on a specific entity’s info
Define faithful representation
useful information faithfully represents economic events
Identify the characteristics of faithful representation
HINT: a faithful representation is Complete, Neutral and Free from error
- Completeness
- Neutrality
- Freedom from error
Define “Completeness” as a characteristic of faithful representation
containing what is needed for user understanding
Define “Neutrality” as a characteristic of faithful representation
unbiased in its selection and presentation
Define “Freedom from Error” as a characteristic of faithful representation
- no errors or omissions in descriptions of the phenomena (fact or observable occurrence) or selection and application of the reporting process
- does not mean it is perfectly accurate
Define the concept of “substance over form” & provide an example
- guides accountants to present the financial reality of a transaction, not merely its legal form
- Example: Consolidation of a legally separate subsidiary by a parent
Identify the 3 step process for applying the fundamental qualitative characteristics
- identify useful info to users of financial reports
- identify relevant info
- determine if info is available and can be faithfully represented
What do enhancing qualitative characteristics do?
enhance the usefulness of relevant and faithfully represented information
Identify the enhancing qualitative characteristics of financial information
HINT: Every Coach Values Team Unity
- Enhancing
- Comparability
- Verifiability
- Timeliness
- Understandability
Define “Comparability” as an enhancing qualitative characteristic
- info s/b comparable with similar information for other entities and the same entity for another period or date
- allows users to understand similarities and differences
How is comparability achieved in financial reporting?
by consistently using the same methods (accounting principles) for the same items over time
Define “Verifiability” as an enhancing qualitative characteristic & provide an example
- Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (not necessarily unanimity) that it is faithfully represented.
- Example: an arm’s length transaction between 2 independent parties suggests verifiability
Define “Timeliness” as an enhancing qualitative characteristic
Information is timely when it is available in time to influence decisions.
Define “Understandability” as an enhancing qualitative characteristic
- information is clearly and concisely classified, characterized, and presented.
- Information should be readily understandable by reasonably knowledgeable and diligent users but should not be excluded because of its complexity
Identify the qualitative characteristics of state and local governments
HINT: Cut Costs To Utilize Real Returns
- cost benefit limitations
- comparability
- timeliness
- understandability
- reliability
- relevance
What does “pervasive” mean?
spread widely throughout an area or group of people
