CHAPTER 3

QUALITATIVE CHARACTERISTICS

- Qualities or attributes that make financial accounting information useful to the users
- Objectives is to ensure that the information is useful to the users in making economic decisions

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

Relevance and faithful representation

APPLICATION OF QUALITATIVE CHARACTERISTICS

First, identify an economic phenomenon that has the potential to be useful

Second, identify the type of information about the phenomenon that would be most relevant and can
be faithfully represented

Third, determine whether the information is available

RELEVANCE

- Capacity of the information to influence a decision

- Information that does not bear on an economic decision is useless

Ingredients of relevance

Predictive value – can be used as an input to processes employed by users to predict future outcome

Confirmatory value – can help shareholders confirm or revise their expectation about an entity’s abilty
to generate earnings

Materiality

- A subquality of relevance based on the nature or magnitude or both of the items to which the
information relates

According to IASB:

- Information is material if omitting, misstating or obscuring it could reasonably be expected to

influence the economic decisions that primary users of general purpose financial statements
make on the basis of those statements which provide financial information about a specific
reporting entity

Important aspects:

a. Could reasonably be expected to influence – adds an element of reasonability of financial

information on which economic decision is based
b. Obscuring information – presentation of financial information not readily understood or not
readily understood or not clearly expressed
c. Primary Users – users to whom general purpose financial statements are primarily directed
FAITHFUL REPRESENTATION

- Financial reports represent economic phenomena or transactions in words and numbers

- Actual effects of the transactions shall be properly accounted for and reported in the financial
statements

Ingredients of Faithful representation

a. Completeness – requires that relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication
- A result of the adequate disclosure standard or the principle of full disclosure
Standard of adequate disclosure
- All significant and relevant information leading to the preparation of financial statements shall
be clearly reported
- Disclosure of any financial facts significant enough to influence the judgment of informed users
b. Neutrality – without bias in the preparation or presentation of financial information
- Synonymous with the all-encompassing principle of fairness

Prudence – exercise of care and caution when dealing with the uncertainties in the measurement
process such that assets or income are not overstated and liabilities or expenses are not
understated

Conservatism – when alternatives exist, the alternative which has the least effect on equity should
be chosen

c. Free from error – no error or omissions in the description of the phenomenon or transaction

Measurement uncertainty – arises when monetary amounts in financial reports cannot be observed
directly and must instead be estimated.

Substance over form – information is to represent faithfully the transactions and other events it
purports to represent, it is necessary that the transactions and events are accounted in accordance
with their substance and reality and not merely their legal form.

ENHANCING QUALITATIVE CHARACTERISTICS

- Relate to the presentation or form of the financial information

Comparability

- The ability to bring together for the purpose of noting points of likeness and difference

Within an entity – quality of information that allows comparisons within a single entity through time
or from one accounting period to the next

Between and across entities – quality of information that allows comparisons between two or more
entities engaged in the same industry.

Across entities – known as intercomparability or dimensional capability

Consistency – use of the same method for the same item, either from period to period within an
entity or in a single period across entities.

- Uniform application of accounting method from period to period

Comparability – uniform application of accounting method between and across entities in the same
industry

Understability – requires that financial information must be comprehensible or intelligible if it is to

be most useful.

Verifiability – different knowledgeable and independent observers could reach consensus, although
not necessarily complete agreement, that a particular depiction is a faithful representation

Types of Verification

Direct Verification – through direct observation such as counting cash

Indirect Verification – checking inputs to a model, formula or other technique and recalculating the
inputs using the same technology

Timeliness – financial information, must be available or communicated early enough when a

decision is to be made

- Older the information, less useful