Chapter 1: Qualitative characteristics of useful accounting information Flashcards
Define relevance in terms of financial information?
Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources.
Financial information can make a difference to decisions if it has one or both of:
Predictive value: it can be used to predict future outcomes.
Confirmatory value: it provides feedback about previous evaluations (it confirms whether past predictions were reasonable).
Define faithful representation.
If information is to be useful, it must represent faithfully the transactions and other events it purports to represent.
Give three characteristics of a faithful representation.
A faithful representation will be:
1. Complete - All information necessary for a user to understand the transactions or events being depicted is included.
- Neutral - Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements. It means that assets and income are not overstated and that liabilities and expenses are not understated (although it does not encourage the understatement of assets and income or overstatement of liabilities and expenses either as those can lead to misstatements in future periods.
- Free from error - Free from error in the context of faithful representation does not mean the information is perfectly accurate in all respects. Instead it means there are no material errors or omissions in the description of it and the process used to produce the reported information has been selected and applied with no errors in the process.
What are the four enhancing qualitative characteristics?
- Comparability
- Verifiability
- Timeless
- Understandability
Define comparability.
Comparability is the qualitative characteristic that enhances users to identify and understand similarities in, and difference among, items.
Information should be produced so that valid comparisons can be made with information from precious periods and with information produced by other entities (for example, the financial statements of similar companies operating in the same line of business).
Comparability should not be confused with consistence. Applying consistency (using the same methods for the same items) is a means of achieving comparability (comparability is the goal).
Define verifiability.
Verifiability helps to assure users that information is a faithful representation of the transactions or events it purports to represent. If information is verifiable it essentially means that is can be proven, for example you may be able to check it is true by examination, inspection or comparison.
The conceptual framework states that verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
Define timeliness.
Timeliness means having information available to decision makers in time to be capable of influencing their decisions.
As a general rule, older information is less useful than recent information.
However, you should note that some information may still be timely for a long time after the end of the reporting period.
This is true of information for users of financial information who need to identify and assess trends.
Define understandability.
Information is understandable if it is classified, characterised and presented clearly and concisely.
When considering whether information is understandable you should bear in mind that financial reports are prepared for users who have a reasonable knowledge of business and economic activities.
