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Course Code: EC1

INITAO COLLEGE Course Title: Intermediate Accounting and Business
Jampason, Initao, Misamis Oriental Application
1st Semester, S.Y. 2023 - 2024 Unit: 3 (Lecture)
Facebook Group: EC1_BSBA1-Initao College 2023

MODULE 4: August 28 – September 1, 2023

Topic: Qualitative Characteristics of Desired Learning Outcomes:
Useful Financial Information  Identify the attributes that make the information
provided in the financial statements useful to others.
Duration: 3 hrs.  Explain the significance of conceptual framework for
financial reporting.
INTRODUCTION
The qualitative characteristics of useful financial information discussed in this module identify the types of
information that are likely to be most useful to the existing and potential investors, lenders and other
creditors for making decisions about the reporting entity on the basis of information in its financial report
(financial information).

ANALYSIS
The International Accounting Standards Board (IASB) has issued the revised conceptual framework for
financial reporting in March 2018. The revised conceptual framework is applicable for annual periods
beginning on or after 1 January 2020.
The conceptual framework sets out:

 the objective of financial reporting the qualitative characteristics of useful financial information
 a description of the reporting entity and its boundary
 definitions of an asset, a liability, equity, income and expenses
 criteria for including assets and liabilities in financial statements (recognition) and guidance on
when to remove them (derecognition)
 measurement bases and guidance on when to use them
 concepts and guidance on presentation and disclosure

Conceptual Framework for Financial Reporting

Third Level:
Second Level:
Conceptual First Level: Basic Recognition,
Fundamental
Framework Objective Measurement and
Concepts
Disclosure Concepts

 Need  Qualitative  Basic assumptions

 Development characteristics  Basic principles
 Overview  Basic elements  Constraints
The revised  Summary of structure
conceptual
framework introduces new concepts on measurement, presentation and
disclosure, derecognition and has updated the definition of assets and liability, and derecognition criteria
for assets and liabilities in financial statements. The revised framework also introduces clarification
on prudence, stewardship, measurement uncertainty and substance over form.
The concept on measurement describes the factors to be considered when selecting a measurement
bases on historical cost and current value. The factors to consider when selecting a measurement basis
are relevant and faithful representation.
Presentation and disclosure concept include guidance on including income and expenses in profit or loss
and other comprehensive income. The revised conceptual framework describes how information should
be presented and disclosed in the financial statements.
The concepts on derecognition specifies guidance on derecognition of assets and liabilities to faithfully
represent both assets and liabilities.

Moreover, the framework is not a standard itself. Sometimes, it may even happen that the rules in the
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accounting standard will be contrary to what the framework says. In this case, you need to apply the
standard, not the framework.
When should you apply the Framework?
In most cases, when there are no specific rules for your transaction and you need to develop your
accounting policy, then you would look to the Framework as you cannot depart from its basic principles
and definitions.
Financial reports provide information about the reporting entity’s economic resources, claims against the
reporting entity and the effects of transactions and other events and conditions that change those
resources and claims. (This information is referred to in the Conceptual Framework as information about
the economic phenomena.) Some financial reports also include explanatory material about
management’s expectations and strategies for the reporting entity, and other types of forward-looking
information.

The qualitative characteristics of useful financial information apply to financial information provided in
financial statements, as well as to financial information provided in other ways. The IASB or International
Accounting Standards Board identified the qualitative characteristics of the conceptual framework of
accounting as the characteristics of accounting information that distinguish better (more useful)
information from inferior (less useful) information for decision-making purposes. The primary qualitative
characteristics are relevance and faithful representation of accounting information that distinguish better
(more useful) information from inferior (less useful) information for decision-making purposes.

Qualitative characteristics are either fundamental or enhancing, depending on how they affect the
decision-usefulness of information. Regardless of classification, each qualitative characteristic contributes
to the decision-usefulness of financial reporting information. However, providing useful financial
information is limited by a constraint on financial reporting – cost should not exceed the benefits of a
reporting practice.

Fundamental Quality – Relevance

Relevance is one of the two fundamental qualities that make accounting information useful for decision-
making. Relevance and related ingredients of this fundamental quality are shown below.

To have relevance, accounting information must be capable of making a difference in a decision.

Information with no bearing on a decision is irrelevant. Financial information is capable of making a
difference when it has predictive value, confirmatory value, or both.

Predictive value – the financial information is useful because it can be used as an input to processes
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employed by users to predict future outcomes, in making users’ own predictions.

Confirmatory value – the financial information is useful if it provides feedback about previous evaluations
(confirms or changes a previous understanding).

Relevant information also helps users confirm or correct prior expectations; it has confirmatory value. For
example, when UPS issues its year-end financial statements, it confirms or changes past (or present)
expectations based on previous evaluations. It follows that predictive value and confirmatory value are
interrelated. Qualitative characteristic

For example, information about the current level and structure of UPS’s assets and liabilities helps users
predict its ability to take advantage of opportunities and to react to adverse situations. The same
information helps to confirm or correct users’ past predictions about that ability. Qualitative characteristic

Materiality is a company-specific aspect of relevance. Information is material if omitting it or misstating it

could influence decisions that users make on the basis of the reported financial information. An individual
company determines whether information is material because both the nature and/or magnitude of the
item(s) to which the information relates must be considered in the context of an individual company’s
financial report. Information is immaterial, and therefore irrelevant, if it would have no impact on a
decision-maker. In short, it must make a difference or a company need not report it. Qualitative
characteristic

Assessing materiality is one of the more challenging aspects of accounting because it requires evaluating
both the relative size and importance of an item. However, it is difficult to provide firm guidelines in
judging when a given item is or is not material. Materiality varies both with relative amount and with
relative importance.

Fundamental Quality – Faithful Representation

Faithful representation means that the numbers and descriptions match what really existed or happened.
Faithful representation is a necessity because most users have neither the time nor the expertise to
evaluate the factual content of the information. For example, if Vanimilktea’s income statement reports
sales of ₱180,000 when it had sales of ₱155,000, then the statement fails to faithfully represent the
proper sales amount. To be a faithful representation, information must be complete, neutral, and free of
material error.

Completeness
Completeness means that all the information that is necessary for faithful representation is provided. An
omission can cause information to be false or misleading and thus not be helpful to the users of financial
reports.

Neutrality
Neutrality means that a company cannot select information to favor one set of interested parties over
another. Unbiased information must be the overriding consideration. For example, in the notes to financial
statements, tobacco companies such as Hope Corp. should not suppress information about the
numerous lawsuits that have been filed because of tobacco-related health concerns—even though such
disclosure is damaging to the company.

Without credible financial statements, individuals will no longer use this information. An analogy
demonstrates the point: Many individuals bet on boxing matches because such contests are assumed not
to be fixed. But nobody bets on wrestling matches. Why? Because the public assumes that wrestling
matches are rigged. If financial information is biased (rigged), the public will lose confidence and no
longer use it.

Free from Error

An information item that is free from error will be a more accurate (faithful) representation of a financial
item.
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Enhancing (Secondary) Qualitative Characteristics

Verifiability
Verifiability is the extent to which information is reproducible given the same data and assumptions. For
example, if a company owns equipment worth $1,000 and told an accountant the purchase cost, salvage
value, depreciation method, and useful life, the accountant should be able to reproduce the same result.
If they cannot, the information is considered not verifiable.

Timeliness
Timeliness is how quickly information is available to users of accounting information. The less timely (thus
resulting in older information), the less useful information is for decision-making. Timeliness matters for
accounting information because it competes with other information. For example, if a company issues its
financial statements a year after its accounting period, users of financial statements would find it difficult
to determine how well the company is doing in the present.

Understandability
Understandability is the degree to which information is easily understood. In today’s society, corporate
annual reports are in excess of 100 pages, with significant qualitative information. Information that is
understandable to the average user of financial statements is highly desirable. It is common for poorly
performing companies to use a lot of jargon and difficult phrasing in its annual report in an attempt to
disguise the underperformance.

Comparability
Comparability is the degree to which accounting standards and policies are consistently applied from one
period to another. Financial statements that are comparable, with consistent accounting standards and
policies applied throughout each accounting period, enable users to draw insightful conclusions about the
trends and performance of the company over time. In addition, comparability also refers to the ability to
easily compare a company’s financial statements with those of other companies.

The qualitative characteristics of accounting information are important because they make it easier for
both company management and investors to utilize a company’s financial statements to make well-
informed decisions.

REFERENCES:
Ballada, W., & Ballada, S. (2007). Basic Accounting, Made Easy - 12th Edition. Manila: DomDane
Publishers & Made Easy Books.
https://annualreporting.info/qualitative-characteristic/
https://annualreporting.info/intfinrepstan/2-qualitative-characteristics-of-useful-financial-information/
https://annualreporting.info/what-is-useful-financial-information/
https://corporatefinanceinstitute.com/resources/knowledge/accounting/qualitative-characteristics-of-
accounting-information/
https://www.crowe.com/mv/insights/revised-conceptual-framework-for-financial-reporting
https://www.cpdbox.com/ifrs-conceptual-framework-2018/
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Initao College
EC1 – Module 4 Assessment

NAME: _____________________________ Contact No. ______________ DATE: __________

COURSE: __________ GROUP NO. _____ LEARNING HUB: ______________________

TRUE OR FALSE. Each statement is either true or false. Put a check mark in the appropriate column for
your answer. 2 points each. Submit this paper on Sept. 14, 2021. Do not use a separate answer sheet.

Statement TRUE FALSE

1. Conceptual Framework is the foundation that standard-setters use when

developing accounting standards.

2. Information provided by financial statements needs to be reliable.

3. The framework is an alternative to the detailed accounting standards as it is

much easier to understand by users of financial statements.

4. Information in an entity's financial statements gains greatly in usefulness if it

cannot be compared with similar information about the entity for some other
period or point in time in order to identify trends in financial performance
and financial position.

5. The Conceptual Framework enables inconsistency of qualitative

characteristics in financial reports.

6. Financial statements should be presented with the assumption that a

reasonable and informed third person will know how to analyse financial
information.

7. Disclosure of the accounting policies employed in the preparation of the

financial statements, of any changes in those policies and of the effects of
such changes enhances the usefulness of financial statements.

8. Information that is relevant and reliable can be excluded from the financial
statements simply because it is too difficult for some users to understand.

9. Information is relevant if it has the ability to influence the economic

decisions of users and is provided in time to influence those decisions.

10. A framework reduces the need to exercise professional judgement in the

exercise of accounting profession.