Qualitative

Characteristics
Qualitative characteristics
 Fundamental QC
- Relevance: predictive/forecasting, confirmatory role,
materiality
- Faithful representation: Completeness, neutrality, Free from
error
- Standard of adequate disclosure, Substance over form,
conservatism
 Enhancing QC
- Comparability, Understandability, Verifiability, timeliness
Qualitative characteristics

 Are the qualities and attributes that make the

financial accounting information useful to the
users.
 Classified as :
Fundamental QC
Enhancing QC
Relevance

The capacity of the information to

influence a decision.
Ingredients of relevance:
Predictive value
Confirmatory value
Materiality (size and nature)
Faithful Representation

 Financial information represents economic phenomena

or transactions in words and numbers.
 Descriptions and figures must match what really existed
or happened.
 Actual effects of transactions are accounted.
 Ingredients:
Completeness
Neutrality
Free from error
Completeness
 Requires
that relevant information shall be presented
in a way that facilitates understanding and avoids
erroneous implication.
 The result of adequate disclosure principle or full
disclosure.
 Disclosure
of significant/material fact to influence
the judgement of informed users.
Example is the notes to financial statements
Neutrality

Preparation of information is
Without bias
Principle of fairness
Free from error
 Means there are no errors or omissions in the
description of the phenomenon or transaction.
 Substance prevail over the form
 Conservatism – prudence : means that when
alternative exist, the alternative with the least
effect on equity should be selected.
Incase of doubt, record any loss and do not record
any gain.
comparability
 The ability to bring together for the purpose of noting of likeness and
differences.

 Comparability within an enterprise – Intracomparability or horizontal

 Comparability between enterprise – Intercomparability or dimensional

 Consistency – implicit in comparability is the principle of consistency

which requires the use of the same method from period to period.
Understandability

 Requires the financial information must be comprehensible or

intelligible if it is to be useful.
Verifiability

 Means that different knowledgeable and independent observer

could reach consensus.
 Implies consensus
 Direct verification – means verifying an amount through direct
observation such as by counting cash.
 Indirect verification means checking the inputs to a model,
formula or other technique and recalculating the inputs using
the same methodology.
Timeliness

 Means that financial information must be available or

communicated early enough before a decision is to be made.
Cost constraint on useful information

The benefit must be more than the cost.

Cost-benefit theory (Benefit must exceed
the cost)
Elements of financial statements
Elements directly related with the financial position of the business:
1.Assets
2.Liabilities
3.Capital
Elements that are directly related with the financial performance of the
business:
4.Income
5. Expense
Recognition of Elements

1. Asset Recognition principle - When future economic benefit

that will flow to the enterprise is probable and measurable.
2. Liability recognition principle – When an outflow of
economic benefit from the enterprise is probable and
measurable.
3. Income recognition principle – Income is recognized when
earned regardless of when received.
4. Expense recognition principle – Expenses are recognized
when incurred regardless of when paid.
Exceptions to the point of sale of
income recognition
 Installment method –income is recognized at the point of collection.
 GPR X Collection
 Cost recovery method or sunk cost method – Revenue is recognized at the point
of collection after cost is fully recovered.
 Cash method – Revenue is recognized when received regardless of when
earned/delivered.
 Percentage of completion method
 Production method – revenue is recognized at the point of production.
 Applicable to agricultural, forest and mineral products.
 There is forward contract or government guarantee – so there is negligible
risk of failure to sell.
Income

 Encompasses bot revenues and gains

Revenues are income derived from the main or
central activities of the business such as selling of
its merchandise inventories.
Gains arises from the peripheral activities of the
business such as selling of non current assets at a
gain.
Expenses

 Encompasses losses and expenses from ordinary

course of business.
Matching Principle of expense recognition
principle

 Match costs with revenues

 Three applications:
Strict matching (Cause and effect
association)
Systematic and rational allocation
Immediate recognition
Measurement of elements
 Historical cost – Past purchase exchange price
 The amount of cash or cash equivalent paid or the fair value of the consideration
given to acquire an asset at the time of acquisition.
 Current Cost – Current purchase exchange price
 The amount or cash equivalent that would have to be paid if the same or equivalent
asset was acquired currently.
 Realizable value – Current sale exchange price
 The amount of cash or cash equivalent that could currently be obtained by selling
the asset in an orderly disposal.
 Present value – Future exchange price
 The discounted value of the future net cash inflows that the asset is expected to
generate in the normal course of business.