Question

Group Ten

Explain the role of qualitative characteristics of accounting information in financial reporting and comment on the relationship between the feedback value and the predictive value as part of the qualities of accounting information

Answer 1

The consumers of Accounting informations are investors, lenders, creditors, legal department etc which desires certain qualitative charecteristics of these accounting informations for proper decision making.

The major Qualitative charecteristics of accounting information are

• Relevance: Fundamental charecteristics which should be present for the accounting info to be useful. The information should be relevant if it can provide information about the past events as well as future directions.
• Faithfulness: Fundamental charecteristics which should be present for the accounting info to be useful. The extend to which the information accurately describes the companys situation which includes its transactions, claims, obligations etc. For Faithfulness the information should be complete, neutral and free from error.
• Timeliness : How quickly the information is passed to all the stakeholders of accounting information. It is better for stakeholders to make decisions if information is passed in a shorter period of time.
• Verifiability : The extend to which the information is reproducible given similar data and assumptions.
• Understandability : The degree to which the information can be understood. It should be crisp, to the point and with less jargons.
• Comparability: Accounting information should be comparable to the past accounting inforamtion of the company. ie: the accounting standards, procedures, policies etc should not be changed frequently in each year of accounting informations.

Feedback value and Predictive value comes as a part under relevance of accounting inforamtion. Feedback value is determined in an information if it can confirm or correct previous expectations. By examining the accounting inforamtion, the user can adjust their predictions made on previous trends which helps in future decision making. Similarly Predicitve value shows that quality information can be used for predicting the future trends, forecast etc based on the past values. Both Predictive value and Feedback value are intertwined and are dependent on each other for a relevant accounting information.