Question

Contrast and compare the qualitative characteristics identified by the International Accounting Standards Board (IASB) with the qualitative Characteristics identified by the Financial Accounting Standards of Statement of Financial Accounting Concepts (SFAC) No. 2.

Answer 1

The four qualitative characteristics identified by IASB are understandability, relevance, faithful representation and comparability. In my understanding,

Understandability means that a qualified financial report should be easily read and should let the reader understand. Understandability will increase when information is classified, characterized, and presented clearly and concisely to enable users comprehend their meaning.

Relevance means the capability of making a difference in the decisions made by users in their capacity as capital providers. A relevant financial report should include both financial and non-financial information. Such information should be able to provide insight into business opportunities, risk as well as possible future scenario for the company.

Faithful representation is to faithfully represent economic phenomena which the information purports to represent, annual reports must be complete, neutral, and free from material error.

Comparability is the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena.

As per Statement of Financial Accounting Concepts No. 2 Qualitative Characteristics of Accounting Information

A Hierarchy of Accounting Qualities
The characteristics of information that make it a desirable commodity can be viewed as a hierarchy of qualities, with usefulness for decision making of most importance.Without usefulness, there would be no benefits from information to set against its costs.

User-Specific Factors
Each decision maker judges what accounting information is useful, and that judgment is influenced by factors such as the decisions to be made, the methods of decision making to be used, the information already possessed or obtainable from other sources, and the decision maker’s capacity (alone or with professional help) to process the information. The optimal information for one user will not be optimal for another.

The hierarchy separates user-specific qualities, for example, understandability, from qualities inherent in information.Information cannot be useful to decision makers who cannot understand it, even though it may otherwise be relevant to a decision and be reliable. However, understandability of information is related to the characteristics of the decision maker as well as the characteristics of the information itself and, therefore, understandability cannot be evaluated in overall terms but must be judged in relation to a specific class of decision makers.

Primary Decision-Specific Qualities
Relevance and reliability are the two primary qualities that make accounting information useful for decision making. Subject to constraints imposed by cost and materiality, increased relevance and increased reliability are the characteristics that make information a more desirable commodity—that is, one useful in making decisions. If either of those qualities is completely missing, the information will not be useful. Though, ideally, the choice of an accounting alternative should produce information that is both more reliable and more relevant, it may be necessary to sacrifice some of one quality for a gain in another.

To be relevant, information must be timely and it must have predictive value or feedback value or both.

To be reliable, information must have representational faithfulness and it must be verifiable and neutral.

Comparability,which includes consistency, is a secondary quality that interacts with relevance and reliability to contribute
to the usefulness of information.

Two constraints are included in the hierarchy, both primarily quantitative in character. Information can be useful and yet be too costly to justify providing it. To be useful and worth providing, the benefits of information should exceed its cost. All of the qualities of information shown are subject to a materiality threshold, and that is also shown as a constraint.

Relevance
• Relevant accounting information is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations. Information can make a difference to decisions by improving decision makers’ capacities to predict or by providing feedback on earlier expectations.

• Timeliness, that is, If information is not available when it is needed or becomes available so long after the reported events that it has no value for future action, it lacks relevance and is of little or no use.
Reliability
• The reliability of a measure rests on the faithfulness with which it represents what it purports to represent, coupled with an assurance for the user that it has that representational quality. To be useful, information must be reliable as well as relevant. Degrees of reliability must be recognized. It is hardly ever a question of black or white, but rather of more reliability or less.

• Verifiability is a quality that may be demonstrated by securing a high degree of consensus among independent measurers using the same measurement methods.

• Neutrality means that, in formulating or implementing standards, the primary concern should be the relevance and reliability of the information that results, not the effect that the new rule may have on a particular interest. The objectives of financial reporting serve many different information users who have diverse interests, and no one predetermined result is likely to suit all interests.
Comparability and Consistency
• Information about a particular enterprise gains greatly in usefulness if it can be compared with similar information about other enterprises and with similar information about the same enterprise for some other period or some other point in time. Comparability between enterprises and consistency in the application of methods over time increases the informational value of comparisons of relative economic opportunities or performance.

Materiality
• Materiality is a pervasive concept that relates to the qualitative characteristics, especially relevance and reliability. Materiality and relevance are both defined in terms of what influences or makes a difference to a decision maker, but the two terms can be distinguished.

Costs and Benefits
• Each user of accounting information will uniquely perceive the relative value to be attached to each quality of that information. In order to justify requiring a particular disclosure, the perceived benefits to be derived from that disclosure must exceed the perceived costs associated with it. There are costs of using information as well as of providing it; and the benefits from providing financial information accrue to preparers as well as users of that information.