What are the qualitative characteristics of financial accounting information?

The primary objective of financial reporting is to provide useful information for making business decisions.

Useful accounting information should possess two fundamental qualitative characteristics:

1. Relevance
   Relevance means that the information can influence the economic decisions made by users.  For example, the information may help users to predict future events, such as future cash flows, and help determine alternative courses of action under consideration.  Information is also relevant if it is able to help decision makers evaluate past decisions.  Thus, information that is relevant is said to have a predictive role and a confirmatory or feedback role.
2. Reliability
   Reliability means that the user is assured that the information presented represents faithfully, without bias, the transactions and events being reported.  This is a major reason that accountants record assets at their original historical cost.  For accountants to record current market values requires the use of estimates, appraisals or opinions, all of which are more unreliable.

Additionally, there are enhancing qualities.

• Timeliness
  For accounting information to be relevant, it must be timely, i.e. it must be available to the decision makers before it loses its capacity to appropriately inform decisions.
• Comparability
  Comparability results when different companies use the same accounting principles.
• Materiality
  It is important that users are not overwhelmed with so much detail that they cannot clearly understand the message.  The concept of materiality relates to the extent to which information can be omitted, misstated or grouped with other information without misleading the statement users when they are making their economic decisions.
• Verifiability
  Information is verifiable if independent observers, using the same methods, obtain similar results.
• Consistency
  A company uses the same accounting principles and methods from year to year.
• Understandability
  When information is included in general purpose financial reports, there is an obvious need for the users of those reports to be able to comprehend their meaning.

Qualitative characteristics are the attributes that make financial  information  useful to users.  The qualitative characteristics of financial information can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information.

Fundamental Qualitative Characteristics  of Financial Information

1. Relevance

Relevant financial reporting information means the ability of users (shareholder) to make a difference in their decision. Information regarding to economic phenomenon will help the users make a difference decision if it included predictive value and confirmatory value.

1. Predictive Value: Information has predictive value if the value can be useful to the shareholder in predicting certain things that is related to future. Information which is highly predictable does not necessary has predictive value. For instance, depreciation of plant and equipment by using straight line method can be highly predictable every year, but it cannot assist in evaluating the net cash flows.
2. Confirmatory value: Information has confirmatory value if it confirms the validity of prior expectation or correcting them according to the prior evaluations. The outcomes will be same as past expected if the information has confirmed past expectation while the outcome can be changed if correcting in past expectations occurred.

2. Faithful Representation

Useful financial information needs not only be a relevant but also be a faithful representation. Financial reporting information included the characteristics of complete, neutral, and free from material error is supposed to be faithful representation of an economic phenomenon. A single description in financial reports may correspond to multiple economic phenomena. For instance, the plant and equipment presents in the balance sheet may stand for all the plant and equipment that owned by entity.

1. Complete: Complete financial reporting information must have all the necessary information which is useful for decision making and should not be missing a material fact or consideration that would cause the financial reporting information misleading.
2. Neutrality: Neutrality in financial reporting information must be free from bias which the information provided does not favor to the particular group over other interested person. In order to have neutral information, information must report in faithful and trustworthiness condition without changing anything that need to be conveyed for the purpose of inducing someone’s behavior.
3. Free from error: A set of financial reporting information is said to be true if the information is free from error. However, due to some constraint and uncertainty in economy phenomena, financial reporting information does not provide absolutely value which is totally free from error. Therefore, a various type of judgments and estimation based on appropriate input are used by the management in assessing the financial reporting.

Relevance is the fundamental qualitative characteristics  of financial information which connected to the economic phenomena and must be considered first before the other qualitative characteristics. Once the relevance is applied to distinguish which economic phenomena should be presented, faithful representation is going to determine which characteristics are best to correspond to the relevant phenomena. Therefore, relevance and faithful representation must work in a line to provide useful financial information to the users.

Enhancing Qualitative Characteristics  of Financial Information

Enhancing qualitative characteristics  of financial information provide additional benefit and usefulness in the financial reporting information. Therefore, the four important characteristics which are comparability, verifiability, timeliness and understandability should be extent widely. However, the enhancing qualitative characteristics will be useless if the financial information is irrelevant or not faithfully represented in fundamental step. The application of the enhancing qualitative characteristics is redundant process that does not follow priority and prescribed order. Sometimes, one or some of the enhancing qualitative characteristics will be given up to maximize the usefulness of another qualitative characteristic. If such situation happened, appropriate information or evidence should be disclosed.

What are the five qualitative characteristics of accounting information?

What are the quantitative characteristics of financial information?

What are some of the characteristics of financial accounting information?

What are the qualitative characteristics of useful accounting information from conceptual framework for financial reporting?