Question

A key characteristic of useful financial information is understandability. How does this qualitative characteristic relate to the background of the user of the information?

Answer 1

A very important and key characteristics of useful financial information is understandability. Understandability is that qualitative characteristic of the information that makes the user of the information understand and comprehend its significance.

If the information has an increased understandability then it has the ability to cater to users across a wide spectrum. This is because if the information has the ability to cater to any particular category of people only then its usefulness and the advantages derived are reduced to a great extent.

This qualitative characteristic relates to the background of the user in the following ways:

1. The financial information is required for the purpose of decision making by a wide range of people. Hence the information should cater to their needs in a simplified manner while tackling all the complex issues and providing information in relation to that without confusing them.
2. The information should be such that it should cater to all kinds of people from educated , sophisticated to people who are not that well versed with technology etc . Therefore information should take into account the background of the users so that all categories of people are able to comprehend as the information is put forth in sufficient detail with consistency.
3. The purpose of the financial information is that it is used for reporting purposes externally and therefore it should be such that it takes into account the interests of the normal investor and user and not just a particular category of persons only and in that way it aids in the correct interpretation of the financial information.