Question

Question 3 (Optional)

Judging whether financial statements of a public sector entity is of right quality or not is not an easy task, especially where the user is an accounting amateur. The Accountant recently laid 2019 financial statements before the Finance and Administrative Committee, of which you are a member. Some members have downgraded the quality of the said financial statements for the mere reason that it was not nice and professional. You felt the committee was unfair in their assessment of the quality of the financial statement since no acceptable framework for quality assessment was used.

Required: Recommend, with justification, an appropriate framework for assessing the qualitative characteristics of financial statements of public sector entities.

Answer 1

The Qualitative Charcteristics are important for all financial and non -financial information. However, the degree of achieving qualitative characteristics may vary as per the uncertainiy or subjective opinion involved. Here are the appropriate framwork for assessing the qualitative characteristics for financial statements of public sector undertakings:

1. Relevance - Information is relevant if it is comparable between objectives set and objectives achieved in financial reporting. And te financial infomration becomes comparable when it has confirmatory value or predictive value or both. Also, information is relevant when it can be used by managers for decision making purposes so that they can effectively and efficiently discharge their duties and responsibilities.

2. True and Fair Representation - Faithful representation is useful in financial reporting. The information is said to be true and fair when it is complete, impartial and does not involve material errors. Any omission or mispresentration of information can lead to economic or other phenomenon as false or misleading.

3. Understandability - Understandability is another aspect that ensures user to comprehend actual meaning. Public Sector enterprises should represent their financial information in such a way that corresponds to the nature of information and meets knowledge base of user. Classification, categorization, clear and concise information are some of the aspects that ensures better understandability of the information.

4. Timeliness - On time information is necessary for the accountability and decision-making purposes. It can be used as a input if provided earlier and enhances its relevance. If the infomration is not provided on time, then it loses its usefulness.

5. Comparability - It is an essential quality of financial statements that enables the user to compare two sets of phenomenas. It describes the quality of two or more infomration to be compared on one common basis. Consistency is also an integral part of comparability. Factors like accounting principles, policies and methods of preparing financial statements increases the usefulness of information, thereby, making it more comparable for projected and actual outcomes.

6. Verifiability- Verifiability is the qualitative characteristic of information that enables the user to verify the economic and other information without material error. Verifiability is not only confined to single point estimate, but it should also include number of possible outcomes and related possibilities that can be verified.