Information, to be useful to the users, should possess certain characteristics. These charecterstics help to evaluate the strengths and weaknesses of accounting and its relevance to effective analysis and decision-making. Four qualitative characteristics identified by IASB conceptual framework are:
Understandability
Information provided in the financial statements must be readily understandable. This implies that the users must understand the information within the context of the decision being made. Because users differ in their ability to comprehend any set of information, this is to be a user-specific quality. For this purpose, it is deemed that the users have reasonable knowledge of the business, economic activities and accounting. However, this does not mean that complex information that users need is to be excluded on the ground that it is too difficult to be understood.
Relevance
Information should be relevant to the decision-making needs of the user. Information is said to be relevant when it influences the economic decision of the users. Relevance of information is said to be affected by its nature and materiality.
In some cases, the nature of information alone is sufficient to determine its relevance. For example, the reporting of a new segment may affect the assessment of risks and opportunities that face the entity.
Information is said to be material if its omission or misstatement could influence the economic decision of users. Financial statements need to possess feed back value and predictive value.
Reliability
Information must be reliable. Reliability means the extent to which information is representationally faithful, and neutral. Representational faithfulness means that the information must represent faithfully the transactions and events it purports to represent. The quality of neutrality implies being free from bias and material errors. To be reliable, information must be free from material error, bias, and be representially faithful.
To be reliable, transactions and events must be accounted for and presented in accordance with their substance and economic reality and not merely legal form.
Information must not be presented in order to achieve a predetermined result or outcome.
Often cash accountants face uncertainties while preparing the balance sheet. In such a situation, for the financials to be reliable, prudence should be exercised. Prudence is the exercise of caution in uncertain conditions.
To be reliable, the information in financial statements must be complete, within the limits of materiality and cost.
Comparability
Comparability is the ability to help users see similarities and differences among events and conditions. It enhances the ability of investors and creditors to compare information across companies to make their resource allocation decisions. The financial statement users must be able to compare the statements of an entity through time in order to identify trends in financial position and compare the financial statements of different entities in order to evaluate their relative financial position and performance. This requires that the users be informed of accounting policies employed in the preparation of financial statements. Closely related to comparability is the notion that consistency of accounting practices over time permits valid comparisons between different periods. Lack of consistency threatens the comparability of the financial statements.
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