Edway - ACCA - FA - Chapter 3 - The Qualitative Characteristics of Financial Information

ACCA
Financial Accounting (F3)

(Chapter 3: The qualitative characteristics of financial information)
Edway Academy
Đào Trường Đăng, ACCA, CPA
0982 762 707
For exams in September 2023, December 2023, March 2024 and June 2024
03.
The qualitative characteristics

of financial information
1
Chapter Overview
The qualitative characteristics of financial information
The IASB’s Qualitative

Business entity The elements of the
Conceptual characteristics of Consistency
concept financial statements
Framework financial information
 Structure of the  The fundamental  Assets;

Conceptual qualitative  Liability;
Framework; characteristics:  Equity;
 Going concern; Relevance,  Income;
 Accruals basis Faithful  Expenses
representation;
 Enhancing
qualitative
characteristics:
Comparability,
Verifiability,
Timeliness,
Understandability
.
Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 3
The IASB’s Conceptual Framework

Conceptual  The basis on which IFRSs are formulated but it is not an accounting standard;
Framework:  A set of principles which underpin the foundations of financial reporting;
 Whenever a new accounting standard is issued, it will be based on the principles of the
Conceptual Framework;
 Its principles should be applied to account for any item where no accounting standard exists.
Chapter 1: The objective of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
Structure of Chapter 4: The elements of the financial statements
the Conceptual
Chapter 5: Recognition and derecognition
Framework
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance
2
Key term
Going The financial statements are normally prepared on the assumption that an
concern: entity is a going concern and will continue in operation for the foreseeable
future. Hence, it is assumed that the entity has neither the intention nor the
need to enter into liquidation or to cease trading. If such an intention or
need exists, the financial statements may have to be prepared on a different
basis. If so, the financial statements describe the basis used.”
(Conceptual Framework for Financial Reporting 2018, para. 3.9)
If the going concern assumption is not followed, that fact must be disclosed, together with the
following information:
 The basis on which the financial statements have been prepared; and
 The reasons why the entity is not considered to be a going concern.
What are indicators about a company which is not a going concern?
 “Break-up basis” / “Liquidation basis” / “In an orderly realization basis”
Scrap value Provisions for future operating loss

Case study 1: Going concern
A retailer commences business on 1 January and buys inventory of 20 washing machines, each
costing $100. During the year, the retailer sells 17 machines at $150 each.
Required
(a) How should the remaining machines be valued at 31 December if the retailer is forced to close
down its business at the end of the year and the remaining machines will realize only $60
each in a forced sale?
(b) How should the remaining machines be valued at 31 December if they intend to continue their
business into the next year?
Solution
(a) If the business is to be closed down, the remaining three machines must be valued at the
amount they will realize in a forced sale, ie 3 x $60 = $180.
(b) If the business is regarded as a going concern, the inventory unsold at 31 December will be
carried forward into the following year, when the cost of the three machines will be matched
against the eventual sale proceeds in computing that year’s profits. The three machines will
therefore be valued at cost, 3 x $100 = $300.
3
Key term
Accruals The effects of transactions and other events are recognized when they
basis: occur (and not as cash or its equivalent is received or paid) and they are
recorded in the accounting records and reported in the financial statements of
the periods to which they relate.
You should take some notes on accrual basis:
The accruals basis is

not an underlying Matching convention
assumption.
According to the accruals

assumption, in computing profit,
revenue earned must be matched
against the expenditure incurred in
earning it.

Case study 2: Emma
Emma purchases 20 T-shirts in her first month of trading (May) at a cost of $5 each. She then
sells them for $10 each. All of Emma’s sales and purchases are on credit and no cash has been
received or paid.
Required
(a) In case Emma then sells all of T-shirts, calculate the profit Emma has made. Then prepare
Emma’s statement of financial position.
(b) In case Emma only sells 16 T-shirts:
 Calculate the profit Emma has made. Then prepare Emma’s statement of financial position.
 If Emma had decided to give up selling T-shirts, how would Emma’s 4 unsold T-shirts be
valued?
 If there is a fall in demand and unsold T-shirts are only to be sold at less than their cost of
$5 each, how should these 4 unsold T-shirts be recorded on the statement of financial
position?
4
Case study 2: Emma
Emma purchases 20 T-shirts in her first month of trading (May) at a cost of $5 each. She then sells
them for $10 each. All of Emma’s sales and purchases are on credit and no cash has been received or
paid.
Solution
(a) In case Emma then sells all of T-shirts, she has made a profit of $100. (W1: 20 x $10 – 20 x $5)
Emma’s statement of financial position $

Assets
Inventory (at cost, ie 0 x $5) -
Accounts receivable (20 x $10) 200
200
Capital and liabilities
Proprietor’s capital (profit or the period) 100
Accounts payable (20 x $5) 100
200

Case study 2: Emma
paid.
Solution
(b) In case Emma then sells only 16 T-shirts, she has made a profit of $80. (W1: 16 x $10 – 16 x $5)
Emma’s statement of financial position $

Assets
Inventory (at cost, ie 4 x $5) 20
Accounts receivable (16 x $10) 160
180
Capital and liabilities
Proprietor’s capital (profit or the period) 80
Accounts payable (20 x $5) 100
180
5
Case study 2: Emma
paid.
Solution
(b) In case Emma then sells only 16 T-shirts, she has made a profit of $80. (W1: 16 x $10 – 16 x $5)
• If Emma had decided to give up selling T-shirts, then the going concern assumption no longer
applies and the value of the two T-shirts in the statement of financial position is break-up
valuation (not cost).
• If the 4 unsold T-shirts are to be sold at less than their cost of $5 each, they should be recorded
on the statement of financial position at their net realizable value (ie the likely eventual sales
price less any expenses incurred to make them saleable) rather than cost.
Qualitative characteristics of financial information

Qualitative characteristics
of financial information
2 fundamental 4 enhancing
qualitative qualitative
characteristics characteristics
 Relevance  Comparability  Consistency  Uniformity

 Materiality
 Predictive value  Verifiability
 Confirmatory value
 Timeliness
 Faithful representation
 Completeness  Understandability
 Neutrality
 Free from errors
 Substance over form
6
Key term
Relevance: “Relevant financial information is capable of making a difference in the

decisions made by users. Financial information is capable of making a
difference in decisions if it has predictive value, confirmatory value or both.”
(Conceptual Framework for Financial Reporting 2018, paras. 2.6-7)
For further interpretation
 Predictive value: The input to process of predictions. Confirmatory value: Provide feedback
about previous evaluations. The predictive and confirmatory roles of information are interrelated.
 The manner of showing information will enhance the ability to make predictions.
 The relevance of information is affected by its nature and materiality.
Key term
Materiality: “Information is material if omitting it or misstating it could influence decisions

that the primary users of general-purpose financial reports make on the basis of
those reports which provide financial information about a specific reporting
entity” (Conceptual Framework for Financial Reporting 2018, para. 2.11)

 In assessing whether or not an item is material, it is not only the value of items which needs to
be considered but also the context (entity-specific: nature, magnitude, professional judgement)

Key term
Faithful “Financial reports represent economic phenomena in words and numbers.

representation: To be useful, financial information must not only represent relevant
phenomena but must faithfully represent the substance of the
phenomena that it purports to represent.”
 A complete depiction: Includes all information necessary for a user to understand the
What
phenomenon being depicted, including all necessary descriptions and explanations.
characteristics
 A neutral depiction: Without bias in the selection or presentation of financial information. A
would a depiction
neutral depiction is not slanted, weighted, emphasized, de-emphasized or otherwise
have? manipulated to increase the probability that financial information will be received favorably or
unfavorably by users.
Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when
making judgements under conditions of uncertainty. The exercise of prudence means that
assets and income are not overstated and liabilities and expenses are not understated.
 Free from error: There are no errors or omissions in the description of the phenomenon and the
process used to produce the reported information has been selected and applied with no errors
in process. Free from error does not mean perfectly accurate in all respects.
Substance over form: A characteristic of faithful representation.
7
Key term
Comparability: “Comparability is the qualitative characteristic that enables users to identity

and understand similarities in, and differences among, items”
“Information about a reporting entity is more useful if it can be compared with
similar information about other entities and with similar information about
the same entity for another period or date”
 To be useful, information should be comparable, not only to different accounting periods but
also to other companies.
 The disclosure of accounting policies is important as it enables users of financial statements
to make valid comparisons of similar items in the accounts of different entities.
 Consistency refers to the use of the same methods for the same items, either from period to
period within a reporting entity or in a single period across entities. Although consistency is
related to comparability, it’s not the same. Comparability is the goal; consistency helps to
achieve that goal.
 Uniformity

Key term
Verifiability: “Verifiability helps assure users that information faithfully represents the
economic phenomena it purports to represent. It means that different
knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a
faithful representation.”
 Information that can be independently verified is generally more useful for decision making than
information that cannot.
8
Key term
Timeliness: “Timeliness means having information available to decision makers in time

to be capable of influencing their decisions. Generally, the older information
is the less useful it is”
 Information may become less useful if there is a delay in reporting it.

 There is a balance between timeliness and the provision of reliable information. (Trade-off)
 If information is reported on a timely basis when not all aspects of the transactions are known, it
may not be complete or free from error.
 If every detail of a transaction is known, it may be too late to publish the information because it
has become irrelevant.
 The overriding consideration is how best to satisfy the economic decision-making needs of the users.

Key term
Understandability: “Classifying, characterizing and presenting information clearly and

concisely makes it understandable”
 Financial reports are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyze the information diligently.
9
Consistency
Key term
Consistency: “Consistency refers to the use of the same methods for the same
items, either from period to period within a reporting entity or in a single
period across entities”.
 Although consistency is related to comparability, it’s not the same. Comparability is the goal;
consistency helps to achieve that goal.
 To maintain consistency, the presentation and classification of items in the financial statements
should stay the same from one period to the next, except as follows:
(a) Where there is a significant change in the nature of the operation or a review of the financial
statements indicates a more appropriate presentation.
(b) Where a change in presentation is required by an IFRS.
Business entity concept

Financial statements always treat the business as a separate entity. In other words, the convention
adopted in preparing accounts (the business entity concept) is always to treat a business as a
separate entity from its owners.
A separate entity from its

owners
How to understand
about the concept of
business entity? Personal transactions of
owners should never be mixed
with the business transactions
10
The elements of the financial statements
Key term
Asset: An asset is a present economic resource controlled by the entity as a result of

past events. An economic resource is a right that has the potential to produce
economic benefits.
Liability: A liability is a present obligation of the entity to transfer an economic
resource as a result of past events.
Equity: Equity is the residual interest in the assets of an entity after deducting all its
liabilities, so:
EQUITY = NET ASSETS = ASSETS – LIABILITIES = SHARE CAPITAL + RESERVES
Income: Income is increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from holders of
equity claims. The definition of income encompasses both revenue (which arises
in the course of ordinary activities of the entity) and gains (other items meeting
the definition of income).
Expenses: Expenses are decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to holders of
equity claims.
Chapter Round-up
The qualitative characteristics of financial information
The IASB’s Qualitative

Business entity The elements of the
Conceptual characteristics of Consistency
concept financial statements
Framework financial information
 Structure of the  The fundamental  The use of the  Financial  Assets;

Conceptual qualitative same methods for statements always  Liability;
Framework; characteristics: the same items, treat the business  Equity;
 Going concern; Relevance, either from period as a separate  Income;
 Accruals basis Faithful to period within a entity;  Expenses
representation; reporting entity or  Personal
 Enhancing in a single period transactions of
qualitative across entities owners should
characteristics: never be mixed
Comparability, with the business
Verifiability, transactions.
Timeliness,
Understandability
.
11
Practice
Question 1: The IASB’s Conceptual Framework for Financial Reporting identifies characteristics
which make financial information faithfully represent what it purports to represent.
Which of the following are examples of those characteristics?
o Neutrality and accruals
o Neutrality and free from error
o Accruals and free from error
o Accruals and going concern
Let’s practice!
Question 2: Which of the following statements best describes the consistency concept?
o Only material items are disclosed.
o The way an item is presented always remains the same.
o Presentation and classification of items should remain the same unless a change is
required by an IFRS.
Practice
Question 3: Making an allowance for receivables is an example of which concept?
o Accruals
o Going concern
o Materiality
o Fair presentation
Question 4: Which accounting concept should be considered if the owner of a business takes goods
from inventory for their own personal use?
Let’s practice!
o The materiality concept

o The accruals concept
o The going concern concept
o The business entity concept
12
Practice
Question 5: Sales revenue should be recognized when goods and services have been supplied to
the customer; costs are incurred when goods and services have been received.
Which accounting concept governs the above?
o The business entity concept
o The duality concept
Let’s practice!
Question 6: Which accounting concept states that omitting or misstating this information could
influence users of the financial statements?
o The consistency concept
o The going concern concept
Practice
Question 7: According to the IASB’s Conceptual Framework, which TWO of the following are part of
faithful representation?
1. Neutrality
2. Relevance
3. Fair presentation
4. Free from material error
o 1 and 2
o 2 and 3
o 1 and 4
Let’s practice!
o 3 and 4
Question 8: Which of the following accounting concepts means that similar items should receive a
similar accounting treatment?
o Conformity
o Accruals
o Matching
o Consistency
13
Practice
Question 9: Listed below are some characteristics of financial information.
1. Relevance
2. Consistency
3. Faithful representation
4. Accuracy
Which TWO of these are qualitative characteristics of financial information according to
the IASB’s Conceptual Framework?
o 1 and 2
o 2 and 4
Let’s practice!
o 3 and 4
o 1 and 3
Practice
Question 10: Which of the following statements describes faithful representation, a qualitative
characteristic of financial information?
o Revenue earned must be matched against the expenditure incurred in earning it.
o Having information available to decision makers in time to be capable of influencing
their decisions.
o The presentation and classification of items in the financial statements should stay
the same from one period to the next.
o Financial information should be complete, neutral and free from error.
Let’s practice!
Question 11: Which one of the following is NOT a qualitative characteristic of financial information
according to the Conceptual Framework?
o Faithful representation
o Relevance
o Timeliness
o Accruals
14
Practice
Question 12: Listed below are some comments on accounting concepts.
1. Financial statements always treat the business as a separate entity.
2. Materiality means that only items having a physical existence may be recognized
as assets.
3. Provisions are estimates and therefore can be altered to make the financial results
of a business more attractive to investors.
Which, if any, of these comments is correct, according to the IASB’s Conceptual
Framework?
o 1 only
Let’s practice!
o 2 only
o 3 only
o None of them
Practice
Question 13: Which of the following statements about accounting concepts and the characteristics of
financial information are correct?
1. The concept of accruals requires transactions to be reflected in the financial

statements once the cash or its equivalent is received or paid.
2. Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
3. Based on faithful representation, it may sometimes be necessary to exclude
material information from financial statements due to difficulties establishing an
accurate figure.
Let’s practice!
o 1 only
o 1 and 2 only
o 2 only
o 2 and 3 only
15
Practice
Question 14: The IASB’s Conceptual Framework gives 6 qualitative characteristics of financial
information. What are these six characteristics?
o Relevance, Faithful representation, Comparability, Verifiability, Timeliness and
Understandability
o Accuracy, Faithful representation, Comparability, Verifiability, Timeliness and
Understandability
o Relevance, Faithful representation, Consistency, Verifiability, Timeliness and
Understandability
Let’s practice!
o Relevance, Comparability, Consistency, Verifiability, Timeliness and Understandability
Question 15: According to the IASB’s Conceptual Framework, which of the following is NOT an
objective of financial statements?
o Providing information regarding the financial position of a business
o Providing information regarding the performance of a business
o Enabling users to assess the performance of management to aid decision making
o Providing reliable investment advice
Practice
Question 16: Which of the following statements about prudence is correct?
o Prudence requires assets to be carried at their lowest possible valuation.
o When prudence is applied, income is not recognized until the cash has been received.
o A prudent decision will mean lower expenditure.
o Prudence does not allow for overstatement of liabilities.
Question 17: Identify, by indicating the relevant box in the table below, whether each of the following
statements is correct or incorrect.
Let’s practice!
Companies should never change the

presentation or classification of items in their
financial statements, even if there is a significant Correct Incorrect
change in the nature of operations.
Companies should create provisions in times of

company growth to be utilized in more difficult
times, to smooth profits. Correct Incorrect
16
Thank You
33
17

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ACCA

Financial Accounting (F3)

0982 762 707

The qualitative characteristics

The qualitative characteristics of financial information

The IASB’s Qualitative

 Structure of the  The fundamental  Assets;

The IASB’s Conceptual Framework

Chapter 1: The objective of general purpose financial reporting

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 4

What are indicators about a company which is not a going concern?

 “Break-up basis” / “Liquidation basis” / “In an orderly realization basis”

Scrap value Provisions for future operating loss

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 5

The IASB’s Conceptual Framework

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 6

You should take some notes on accrual basis:

The accruals basis is

According to the accruals

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 7

The IASB’s Conceptual Framework

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 8

Emma’s statement of financial position $

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 9

The IASB’s Conceptual Framework

Emma’s statement of financial position $

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 10

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 11

Qualitative characteristics of financial information

 Relevance  Comparability  Consistency  Uniformity

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 12

Relevance: “Relevant financial information is capable of making a difference in the

For further interpretation

Materiality: “Information is material if omitting it or misstating it could influence decisions

For further interpretation

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 13

Qualitative characteristics of financial information

Faithful “Financial reports represent economic phenomena in words and numbers.

Substance over form: A characteristic of faithful representation.

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 14

Comparability: “Comparability is the qualitative characteristic that enables users to identity

For further interpretation

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 15

Qualitative characteristics of financial information

For further interpretation

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 16

Timeliness: “Timeliness means having information available to decision makers in time

For further interpretation

 Information may become less useful if there is a delay in reporting it.

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 17

Qualitative characteristics of financial information

Understandability: “Classifying, characterizing and presenting information clearly and

For further interpretation

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 18

For further interpretation

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 19

Business entity concept

A separate entity from its

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 20

Asset: An asset is a present economic resource controlled by the entity as a result of

Edway.edu.vn Financial Accounting (F3) The qualitative characteristics of financial information 21

The qualitative characteristics of financial information

The IASB’s Qualitative