Qualitative Characteristics Flashcards
What are the two Qualitative Characteristics?
Relevance and Faithful Representation
What makes information relevant?
Predictive value and Confirmatory value
What is the characteristic of Predictive value?
It can be used to make predictions about the future, e.g plan budgets.
What is the characteristic of Confirmatory value?
It can provide feedback on past performance of trends.
What is materiality?
Materiality is the capacity of information to influence financial decisions. Materiality of information is based on its size and nature, e.g a $25 chair may be omitted because it is unlikely to alter decisions.
What is needed for Faithful Representation?
Information that holds Faithful Representation must be complete, neutral and free from error.
Define Complete information.
Information that contains all the necessary explanations so that the information can be understood.
Define Neutral information.
Information that is free from bias and therefore does not favour certain users. e.g “Arm’s length transaction.”
Define free from error.
All information is accurate with no mistakes or omissions in the description of the information. (Note, the statements are not necessarily 100% correct, 95% is considered acceptable.)
Define Enhancing Characteristics.
Any information that can improve the relevance or faithful representation of information in the financial statements.
What are the four Enhancing Characteristics?
Understandability, Comparability, Timeliness and Verifiability.
Define Understandability.
The ease of information to be readily understood by users to allow decisions to be made. Understandability can be improved be displaying information in graphs, removing jargon etc.
Define Comparability.
The ability of financial information to be compared to previous accounting periods and similar businesses in order to measure the performance of the company.
Define Timeliness.
The availability of the information in time for it to influence the decisions of the users.
Define Verifiability.
The ability to ensure that the information presented faithfully represents the accounts, event or transaction. Different independent users should be able to agree that the information is accurate.
