Question

briefly explain the qualitative characteristics of financial information, including :
A: eundamental qualitative charateristics
B: enhancing qualitative characteristics.

the answer should not be more than 2 pages.

Answer 1

Qualitative characteristics are the attributes of financial information that tend to enhance its understandability and usefulness. In order for the financial statements to be useful to the stakeholders of a business, it should have certain qualitative characteristics. They are as follows;

Following are the fundamental qualitative characteristics of financial information

1)Relevance

To be relevant, information must be available in time, must help in prediction and feedback, and must influence the decisions of users by :

(a) helping them form prediction about the outcomes of past, present or future events; and/or

(b) confirming or correcting their past evaluations.

2) Faithfulness

Faithfulness means the users must be able to depend on the information. The reliability of financial information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured, and displayed. It should be free from error and bias and faithfully represents what it is meant to represent. To ensure reliability, the information disclosed must be credible, verifiable by independent parties use the same method of measuring, and be neutral and faithful.

Enhancing Qualitative Characteristic

1. Comparability

It is not sufficient that the financial information is relevant and reliable at a particular time, in a particular circumstance, or for a particular reporting entity. But it is equally important that the users are able to compare various aspects of an entity over different time periods and with other entities. Comparability is the degree to which accounting standards and policies are consistently applied from one period to another.

2. Verifiability

Financial information is supported by evidence and independent individuals can check them to see whether such information is faithfully represented. In other words, information is verifiable if it can be audited.

3) Timeliness

Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions. It shouldn't be significantly delayed or else it will be of little or no value.

4) Understandability

Understandability means decision-makers must interpret it in the same sense as it is prepared and conveyed to them. To be understandable, the information should be presented clearly and concisely. However, it is improper to exclude complex items just to make the reports simple and understandable.