QUALITATIVE CHARACTERISTICS

QUALITATIVE CHARACTERISTICS
• Are the qualities or attributes that make the
financial accounting information useful to the users.
 CLASSIFICATION OF QUALITATIVE
CHARACTERISTICS
FUNDAMENTAL QC ENHANCING QC

• Relate to the content or • relate to the presentation or

form of the financial
substance of the financial information.
information
• COMPARABILITY
• RELEVANCE
• UNDERSTANDABILITY
• FAITHFUL REPRESENTATION
• VERIFIABILITY
• TIMELINESS
RELEVANCE INGREDIENTS
-it is the capacity of information
to influence a decision.
• PREDICTIVE
-The financial information must VALUE
be capable of making a
difference in the decisions made
by the users. • CONFIRMATORY
VALUE
-Information that does not bear
on an economic decision is
useless. • MATERIALITY
 PREDICTIVE VALUE
• predict future outcome
 CONFIRMATORY VALUE
• provides feedback about previous
evaluations to help users confirm or correct
earlier expectations.

• “FEEDBACK VALUE”
 MATERIALITY
• practical rule in accounting which dictates that strict adherence to
GAAP is not required when the items are not significant enough to
affect the evaluation, decision and fairness of the financial
statements.
- also known as the doctrine of convenience

• materiality is a relativity
– materiality of an item depends on its relative size

– depends on good judgment, professional expertise and common sense.

– an item is material if knowledge of it would affect or influence the decision

of the informed users of the FS.

• factors of materiality
– Size of the item
– Nature of the item
 FAITHFUL
REPRESENTATION INGREDIENTS
•Used instead of reliability
Completeness
•Means that financial reports
represent economic phenomena or Neutrality
transactions in words and numbers.
Free from error

•Means actual effects of the

transactions shall be properly
accounted for and reported in the
financial statements.
 COMPLETENESS
• requires that relevant information should be
presented in a way that facilitates understanding
and avoids erroneous implication.

• it is the result of the adequate disclosure

standard or the principle of full disclosure
• to be complete, the FS shall be
accompanied by notes to financial statements.

• the purpose of the notes is to provide the

necessary disclosures required by PFRS
STANDARD OF ADEQUATE DISCLOSURE
• Means that all significant and relevant
information leading to the preparation of
financial statements shall be clearly reported.

• The rule is that the accountant shall disclose a

material fact known to him which is not
disclosed in the FS but disclosure of which is
necessary in order that the statements would
not be misleading.
 NEUTRALITY

a neutral depiction is without bias in

the preparation or presentation of
financial statements.
 NEUTRALITY
*to be neutral, the information contained in the FS must be free
from bias.

*the financial information should not favor one party to the

detriment of another party.

*the information is directed to the common needs of many

users, and not to the particular needs of specific users.

*Synonymous with the all-encompassing “principle of fairness”

*To be neutral is to be fair

 FREE FROM ERROR
• means there are no errors or omissions in the
description of the phenomenon or
transaction, and the process used to produce
the reported information has been selected
and applied with no errors in the process.
 SUBSTANCE OVER FORM
• TRANSACTIONS MUST BE ACCOUNTED FOR IN
ACCORDANCE WITH THEIR SUBSTANCE AND REALITY NOT
MERELY THEIR LEGAL FORM.

• NOT CONSIDERED AS SEPARATE COMPONENT FROM

FAITHFUL REPRESENTATION BECAUSE IT WOULD BE
REDUNDANT.

• FAITHFUL REPRESENTATION INHERENTLY REPRESENTS THE

SUBSTANCE OF AN ECONOMIC TRANSACTION RATHER
THAN MERELY REPRESENTING ITS LEGAL FORM.
 CONSERVATISM
• when alternatives exist, the alternative which has the least
effect on equity should be chosen.

• possible errors in measurement be in the direction of

understatement rather than overstatement of net income
and net assets.

• In case of doubt, record any loss, and do not record any gain

• contingent loss is recognized as a provision if probable and

measurable

• contingent gain is not recognized but disclosed only.

 PRUDENCE
• is the desire to exercise care and caution
when dealing with uncertainties in the
measurement process such that assets or
income are not overstated and liabilities or
expenses are not understated.
 EXPRESSIONS OF CONSERVATISM OR
PRUDENCE

• “ANTICIPATE NO PROFIT AND PROVIDE FOR

PROBABLE AND MEASURABLE LOSS.”

• “DON’T COUNT YOUR CHICKS UNTIL THE

EGGS HATCH.”
 ENHANCING QUALITATIVE
CHARACTERISTICS
- RELATE TO THE PRESENTATION OR FORM OF
THE FINANCIAL INFORMATION.

- ENHANCING QC’S ARE:

• COMPARABILITY
• UNDERSTANDABILITY
• VERIFIABILITY
• TIMELINESS
 COMPARABILITY
• THE ABILITY TO BRING TOGETHER FOR THE
PURPOSE OF NOTING POINTS OF LIKENESS
AND DIFFERENCE.
 COMPARABILITY
WITHIN AN ENTITY BETWEEN AND ACROSS ENTITIES

• THE QUALITY OF • THE QUALITY OF

INFORMATION THAT INFORMATION THAT
ALLOWS COMPARISONS ALLOWS COMPARISONS
WITHIN A SINGLE ENTITY BETWEEN TWO OR MORE
THROUGH TIME OR FROM ENTITIES ENGAGED IN THE
ONE ACCOUNTING PERIOD SAME INDUSTRY.
TO THE NEXT.

• ALSO KNOWN AS
• ALSO KNOWN AS
“INTERCOMPARABILITY”
“HORIZONTAL
COMPARABILITY”
• OR “DIMENSIONAL
• OR “INTRACOMPARABILITY” COMPARABILITY”
IMPLICIT IN THE QC
COMPARABILITY IS THE
PRINCIPLE OF CONSISTENCY
 CONSISTENCY
• REQUIRES THAT THE ACCOUNTING METHODS
AND PRACTICES SHOULD BE APPLIED ON A
UNIFORM BASIS FROM PERIOD TO PERIOD.

• THE UNIFORM APPLICATION OF ACCOUNTING

METHOD FROM PERIOD TO PERIOD WITHIN
AN ENTITY.

• THE UNIFORM APPLICATION OF ACCOUNTING

METHOD BETWEEN AND ACROSS ENTITIES IN
THE SAME INDUSTRY.
 UNDERSTANDABILITY
• REQUIRES THAT FINANCIAL INFORMATION
MUST BE COMPREHENSIBLE OR INTELLIGIBLE
IF IT IS TO BE MOST USEFUL.

• FINANCIAL REPORTS ARE PREPARED FOR

USERS WHO HAVE A REASONABLE
KNOWLEDGE OF BUSINESS AND ECONOMIC
ACTIVITIES AND WHO REVIEW AND ANALYZE
THE INFORMATION DILIGENTLY.
 VERIFIABILITY
• MEANS THAT DIFFERENT KNOWLEDGEABLE AND
INDEPENDENT OBSERVERS COULD REACH CONSENSUS,
ALTHOUGH NOT NECESSARILY COMPLETE AGREEMENT,
THAT A PARTICULAR DEPICTION IS A FAITHFUL
REPRESENTATION.

• 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.

• VERIFIABLE FINANCIAL INFORMATION PROVIDES RESULTS

THAT WOULD BE SUBSTANTIALLY DUPLICATED BY
MEASURERS USING THE SAME MEASUREMENT METHOD.
 VERIFICATION
DIRECT VERIFICATION INDIRECT VERIFICATION
• - MEANS VERIFYING • - MEANS CHECKING
AN AMOUNT OR OTHER THE INPUTS TO A MODEL,
REPRESENTATION FORMULA OR OTHER
THROUGH DIRECT TECHNIQUE AND
OBSERVATION. RECALCULATING THE
INPUTS USING THE SAME
• - EXAMPLE (CASH METHODOLOGY.
COUNT)
 TIMELINESS
- MEANS THAT FINANCIAL INFORMATION MUST BE
AVAILABLE OR COMMUNICATED EARLY ENOUGH WHEN A
DECISION IS TO BE MADE.

- RELEVANT AND FAITHFULLY REPRESENTED FINANCIAL

INFORMATION FURNISHED AFTER A DECISION IS MADE IS
USELESS OR OF NO VALUE.
 COST CONSTRAINT ON USEFUL INFORMATION
COST - IS A PERVASIVE CONSTRAINT ON THE
INFORMATION THAT CAN BE PROVIDED BY FINANCIAL
REPORTING.

*THE COST CONSTRAINT IS A CONSIDERATION OF THE COST

INCURRED IN GENERATING FINANCIAL INFORMATION AGAINST
THE BENEFIT TO BE OBTAINED FROM HAVING THE INFORMATION.

*THE RULE IS “THE BENEFIT DERIVED FROM THE INFORMATION

SHOULD EXCEED THE COST INCURRED IN OBTAINING THE
INFORMATION.”

*EVALUATION OF THE COST CONSTRAINT IS SUBSTANTIALLY A

JUDGMENTAL PROCESS. ASSESSING WHETHER THE COST OF
REPORTING OUTWEIGHS OR FALLS SHORT OF THE BENEFIT IS
DIFFICULT TO MEASURE AND BECOMES A MATTER OF
PROFESSIONAL JUDGMENT.