QUALITATIVE

CHARACTERISTICS
ACCA102 - Conceptual Framework and Accounting Standards

Joanna Marie U. Revilla

Objectives:
■ Enumerate and describe the qualitative characteristics of accounting
information
■ Enumerate and describe the fundamental qualitative characteristics
■ Enumerate and describe the enhancing qualitative characteristics
■ Explain the cost constraint on useful information
Qualitative Characteristics
- are the qualities or attributes that
make financial accounting information
useful to the users.

In deciding which information to include in financial statements,

the objective is to ensure that the information is useful to the
users in making economic decisions.
The Conceptual Framework classifies the qualitative
characteristics into the following:

1) Fundamental Qualitative Characteristics

2) Enhancing Qualitative Characteristics

 Application of
Qualitative Characteristics
Application of Qualitative Characteristics
1) Identify an economic phenomenon that has
a potential to be useful

2) Identify the type of information about the

phenomenon that would be most relevant
and can be faithfully represented..

3) Determine whether the information is

available.
1)Fundamental Qualitative Characteristics
- these are the characteristics that make
information useful to users

They consist of the following:

a) RELEVANCE

b) FAITHFUL REPRESENTATION
1)Fundamental Qualitative Characteristics
- these are the characteristics that make
information useful to users

They consist of the following:

a) RELEVANCE

b) FAITHFUL REPRESENTATION
2) Enhancing Qualitative Characteristics
- these are the characteristics that
enhance the usefulness of information

They consist of the following:

a) VERFIABILITY
b) COMPARABILITY
c) UNDERSTANDABILITY
d) TIMELINESS
2) Enhancing Qualitative Characteristics
- these are the characteristics that
enhance the usefulness of information

They consist of the following:

a) VERFIABILITY
b) COMPARABILITY
c) UNDERSTANDABILITY
d) TIMELINESS
A) Fundamental
Qualitative
Characteristics
Fundamental Characteristics
- relate to the content and substance of
financial information

- these are the characteristics that make

information useful to users

Information must be both relevant and

faithfully represented for it to be useful.
RELEVANCE
Relevance
- the capacity of the information to influence a decision

To be relevant, the financial information must be capable of

making a difference in the decisions made by the users
Ingredients of Relevance
Relevant information has the following:

PREDICTIVE VALUE - the information can

be used to make
predictions

CONFIRMATORY VALUE - the information can be

used in confirming previous
(Feedback value) predictions.
Materiality
"Information is material if omitting, misstating or obscuring it
could reasonably be expected to influence decisions that
the primary users of a specific reporting entity's general
purpose financial statements make on the basis of those
financial statements.” (ED/2017/6 Definition of Material)
Materiality
Materiality is really a quantitative “threshold” linked very
closely to the qualitative characteristic of relevance,
The relevance of information is affected by its nature and materiality.

In other words, materiality is a subquality of relevance based on the nature

or magnitude or both of the items to which the information relates.

The Conceptual Framework does not specify a uniform quantitative

threshold for materiality or predetermine what could be material in a
particular situation.
 Materiality of an item depends on relative size
than absolute size.

What is material for one entity may be immaterial for another.

When is an item material?
This is dependent on good judgement, professional
expertise and common sense

General guide:

“ An item is material if knowledge of it would affect or influence the

decision of the informed users of the financial statements.”
Factors of Materiality

Relative Size Nature

 FAITHFUL
REPRESENTATION
Faithful Representation

- means the information provides a true, correct

and complete depiction of what it purports to
represent.

- means that the actual effects of the

transactions shall be properly accounted for
and reported in the financial statements
Ingredients of Faithful Representation

a) COMPLETENESS

b) NEUTRALITY

c) FREE FROM ERROR

a) COMPLETENESS
- all information necessary for users to understand the
phenomenon being depicted are provided.

- requires that relevant information should be presented

in a way that facilitates understanding and avoids
erroneous implication

- result of the adequate disclosure or the principle of full

disclosure

Standard of adequate disclosure

- means that 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 judgement
of informed users.
b) NEUTRALITY
- information is selected or presented without bias or free
from bias

- information is not manipulated to increase the probability

that users will receive it favorably or unfavorably.

- is synonymous with the all-encompassing principle of

fairness

To be neutral is to be fair.
Prudence
- is the 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.

Neutrality is supported by the exercise of prudence

Conservatism
- synonymous with prudence

- means that when alternatives exist, the

alternative which has the least effect on
equity should be chosen.
- means “in case of doubt, record any loss and
do not record any gain.”
c) FREE FROM ERROR
- this does not mean that the information is perfectly accurate
in all respects.
- Free from error means there are no errors in the description
and in the process by which the information is selected and
applied. If the information is an estimate, that fact should be
described clearly, including an explanation of the process
used in making that estimate.
Substance over form
If the 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.

Substance over form is NOT considered a separate

component of faithful representation because it would
be redundant.
B) Enhancing
Qualitative
Characteristics
Enhancing Qualitative Characteristics
- these are the characteristics that enhance the
usefulness of information. It relates to presentation or
form of the financial information.

Relevant and faithfully represented financial information

is useful but the information would be MORE USEFUL if it is
comparable, understandable, verifiable, and timely.
COMPARABILITY
COMPARABILITY
- Information is comparable if it helps users identify
similarities and differences between one information
and another information.

Comparability within an entity Comparability across entities

(Intracomparability / (Intercomparability /
Horizontal comparability) Dimensional comparability)

- Through time or from one - Between two or more entities

accounting period to the next engage in the same industry
Consistency

- refers to the use of the same methods for the same items.
Comparability is the goal while consistency is the means of
achieving that goal.

- Consistency is desirable and essential to achieve comparability

of financial statements
UNDERSTANDABILITY
Understandability
- Information is understandable if it is presented in a clear
and concise manner.

- Understandability does not mean that complex matters should

be excluded to make information understandable to users
because this would make information incomplete and
potentially misleading. Accordingly, financial reports are
intended for users:

a. who have reasonable knowledge of business activities; and

b. who are willing to analyze the information diligently.
VERIFIABILITY
Verifiability
- Information is verifiable if different users could reach an
agreement as to what the information purports to represent.

- Implies consensus

The financial information is verifiable in the sense that it is

supported by evidence so that an accountant that would look
into the same evidence would arrive at the same economic
decision or conclusion.
 Types of verification

Direct Indirect
- through direct - Checking the inputs to a
observation model or formula or other
technique and recalculating
the inputs using the same
methodology
TIMELINESS
Timeliness
- Information is timely if it is available to users in time to be
able to influence their decisions.

Relevant and faithfully represented financial information

furnished after a decision is made is useless or of no value.

For example, the most important attribute of quarterly or interim

financial information is its timeliness. Generally, the older the
information, the less useful.
Cost constraint on useful information
Cost is a pervasive constraint on the entity's ability to
provide useful financial information.

Reporting financial information imposes cost and it is

important that such cost is justified by the benefit derived
from the financial information.

Benefit > Cost

Summary: Qualitative Characteristics
1) Fundamental qualitative characteristics
a) Relevance (predictive value & confirmatory value)
➢ Materiality (entity-specific aspect of relevance)
b) Faithful representation (completeness, neutrality, &
free from error)
2) Enhancing qualitative characteristics
a) Verifiability
b) Comparability
c) Understandability
d) Timeliness
Questions?
Clarifications?