Which qualitative characteristics of accounting information is reflected when the accounting information is free from errors?

Qualitative characteristics are the attributes that make financial information useful to users. 

For Analytical purposes, Qualitative characteristics can be differentiated into Fundamental and Enhancing qualitative characteristics. 

 FUNDAMENTAL QUALITATIVE CHARACTERISTICS 

Fundamental  Characteristics distinguish useful financial reporting information from that is not useful or misleading. 

The two fundamental Qualitative characteristics are : 

1. Relevance 
2. Faithful Representation 

Relevance: In accounting, the term relevance means it will make a difference to a decision maker. Relevant information is capable of making a difference in the decisions made by users. It is capable of making a difference in decisions if it has predictive value, confirmatory value , or both.  

Predictive value helps users in predicting or anticipating future outcomes. Confirmatory value enables users to check and confirm earlier predictions or evaluations. 

For example, in the decision to replace an equipment that has been used for the past six years, the original cost of the equipment does not have relevance. In other words, the original cost is irrelevant or is not relevant in the decision to replace the equipment. What will have relevance are the future amounts, such as the cost of the new equipment, and the savings that will occur when the old equipment is replaced. 

 Here's another expression of relevance: Costs that will differ among alternatives. Costs that will not differ among alternatives do not have relevance. 

 In order to have relevance, accounting information must be timely. Financial statements issued three weeks after the accounting period ends will have more relevance than financial statements issued several months after the period ends. Having timeliness and relevance may mean sacrificing some precision or reliability. 

The Relevance of information is affected by its nature and its materiality. 

Materiality : Information is material if omitting it, or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. 

Materiality is an aspect of relevance which is entity-specific. It means that what is material to one entity may not be material to another. It is relative. Information is material if it is significant enough to influence the decision of users. Materiality is affected by the nature and magnitude (or size) of the item. 

Faithful Representation is the second Fundamental Qualitative Characteristic. 

Faithful Representation 

The Financial reports represent economic phenomena in words and numbers. The financial information in the financial reports should represent what it purports to represent. Meaning, it should show what really are present (Example: Position of Assets and Liabilities) and what really happened (Example: Position of Income and expenditure), as the case may be.  

There are three characteristics of faithful representation:  

1. Completeness: Depiction of all necessary information for a user to understand the phenomenon being depicted. It includes all necessary descriptions and explanations (adequate or full disclosure of all necessary information),  

2. Neutrality: Depiction is without bias in the selection or presentation of Financial information uust not be manipulated in any way in order to influence the decision of users. (fairness and freedom from bias), We often refer to a term called True and Fair View in Accounting. 

3. Free from error: means there are no errors and inaccuracies in the description of the phenomenon and no errors made in the process by which the financial information was produced. (no inaccuracies and omissions). That does not mean no inaccuracies can arise, particularly in case of making estimates. The standards expect that the estimates are made on a realistic basis and not arbitrarily. 

 ENHANCING QUALITATIVE CHARACTERISTICS 

Enhancing Qualitative Characteristics distinguish more useful information from less useful information.

The Enhancing Qualitative Characteristics are divided into 4 attributes.

1. Comparability 
2. Verifiability
3. Timeliness
4. Understandability

COMPARABILITY

Comparability is the Qualitative characteristic that enables users to identify 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 other entities and with similar information about the same entity for another period or date.  

Comparable information enables comparisons within the entity and across entities. When comparisons are made within the entity, information is compared from one accounting period to another. For example: income is compared for the years 2014, 2015, and 2016. Comparability of information across entities enables analysis of similarities and differences between different companies. Corresponding information for preceding periods should be shown to enable comparison over time.

Consistency vs. Comparability

Consistency is not the same as Comparability. Consistency refers to the use of the same methods for the same items (Consistency of Treatment) either from period to period within a reporting entity or in a single period across entities. Users must be able to distinguish between different accounting policies in order to be able to make a valid comparison of similar items in the accounts of different entities.

VERIFIABILITY

A company's accounting results are verifiable when they're reproducible, so that, given the same data and assumptions, an independent accountant can produce the same result the company did. 

Verifiability helps assure that Information faithfully represents the economic phenomena it purports to represent. It means that different knowledgeable and observers could reach consensus that a particular depiction is a Faithful Representation.  Verifiability isn't about determining whether the assumptions a company makes are correct. Rather, it's about determining whether the accounting result the company reaches is appropriate for the data, given the assumptions that have been made.

The Financial Accounting Standards Board, which writes the rules for the U.S. accounting profession, says that verifiability provides assurance that "accounting measures represent what they purport to represent." It's not enough for a company to say the answer is "2." It also has to show you the "1 + 1" on the other side of the equation. Verifiability.

Verifiability has its own limitations too.

1. Verifiability doesn't have to do with determining the truthfulness of the data a company provides, but rather with making sure its results logically flow from the data. 
2. verifiability also doesn't pass judgment on whether the assumptions made are correct or even appropriate, just whether the result matches the assumptions.
3. Finally, verifiability is silent on the interpretation of accounting results.

TIMELINESS

The timeliness of accounting information refers to the provision of information to users quickly enough for them to take action. Information becomes obsolete and useless if it is not reported within time. Usually the Statute specifies the time for preparation and presentation of Financial reports.

UNDERSTANDABILITY

Classifying, Characterising presenting information clearly and concisely makes it Understandable.

A principle which states that a company's financial information should be presented in such a way that a person with a reasonable knowledge of business and finance, and the willingness to study the information, should be able to comprehend it. This principle is included in the Accounting Standards Board's Statement of Principles.

by Shyam Sunder Kasturi

Source : ACCA Study Material

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which qualitative characteristics of accounting information is reflected when accounting information is clearly presented understandability relevance comparability reliability

which qualitative characteristics of accounting information is reflected when accounting information is clearly presented understandability relevance comparability reliability - Accountancy - Theory Base of Accounting

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Subject: Accountancy, asked on 26/2/20

which qualitative characteristics of accounting information is reflected when accounting information is clearly presented understandability relevance comparability reliability

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Rachna Puneet Mehta answered this

Dear student

Understandibility qualitative characteristics of accounting information is reflected when accounting information is clearly presented.

As understandibility means that the information provided through the financial statements be presented in a manner that the users are able to understand it in the manner it should be.

Regards

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Which qualitative characteristic of accounting information is reflected when accounting information is clearly presented ?

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Question

Which qualitative characteristic of accounting information is reflected when accounting information is clearly presented ? 

Understandability

Relevance

Comparability

Reliability

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Updated on : 2022-09-05

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Correct option is A)

Adherence to a reasonable level of understandability would prevent an organization from deliberately confusing financial information in order to mislead users of its financial statements.

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Qualitative Characteristics of Accounting Information

The demand for accounting information by investors, lenders, creditors, etc., creates fundamental qualitative characteristics that are

Qualitative Characteristics of Accounting Information

The fundamental (primary) and enhancing (secondary) qualitative characteristics

Written by CFI Team

Updated April 22, 2022

What are the Qualitative Characteristics of Accounting Information?

The demand for accounting information by investors, lenders, creditors, etc., creates fundamental qualitative characteristics that are desirable in accounting information. There are six qualitative characteristics of accounting information. Two of the six qualitative characteristics are fundamental (must have), while the remaining four qualitative characteristics are enhancing (nice to have).

Fundamental (Primary) Qualitative Characteristics

Qualitative characteristics of accounting information that must be present for information to be useful in making decisions:

Relevance

Representational faithfulness

Enhancing (Secondary) Qualitative Characteristics

Qualitative characteristics of accounting information that impact how useful the information is:

Verifiability Timeliness Understandability Comparability

We will look at each qualitative characteristic in more detail below.

Relevance

Relevance refers to how helpful the information is for financial decision-making processes. For accounting information to be relevant, it must possess:

Therefore, accounting information is relevant if it can provide helpful information about past events and help in predicting future events or in taking action to deal with possible future events. For example, a company experiencing a strong quarter and presenting these improved results to creditors is relevant to the creditors’ decision-making process to extend or enlarge credit available to the company.

Representational Faithfulness

Representational faithfulness, also known as reliability, is the extent to which information accurately reflects a company’s resources, obligatory claims, transactions, etc. To help, think of a pictorial depiction of something in real life – how accurately does the picture represent what you see in real life? For accounting information to possess representational faithfulness, it must be:

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.

More Resources

Thank you for reading CFI’s guide on Qualitative Characteristics of Accounting Information. To keep learning and advancing your career, the following resources will be helpful:

Audit Materiality

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