Which are the enhancing qualitative characteristics of financial statement?

Enhancing qualitative characteristic – A qualitative characteristic that makes financial information more useful if the information both is relevant and provides a faithful representation.

Comparability, verifiability, timeliness and understand-ability are qualitative characteristics that enhance the usefulness of information that both is relevant and provides a faithful representation of what it purports to represent. The enhancing qualitative characteristics may also help determine which of two ways should be used to depict a phenomenon if both are considered to provide equally relevant information and an equally faithful representation of that phenomenon.

Comparability

An enhancing qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Enhancing qualitative characteristic

The Conceptual Framework provides the following guidance [Conceptual Framework 2.24 – 2.29]:

Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, 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 another date.

Users must be able to compare the financial reports of an entity through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial reports of different entities in order to evaluate their relative financial position, financial performance and cash flows. Hence, the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout an entity and over time for that entity and in a consistent way for different entities.

An important implication of the qualitative characteristic of comparability is that users be informed of the accounting policies employed in the preparation of the financial report, any changes in those policies and the effects of such changes. Users need to be able to identify differences between the accounting policies for like transactions and other events used by the same entity from period to period and by different entities. Compliance with IFRS, including the disclosure of the accounting policies used by the entity, helps to achieve comparability.

The need for comparability should not be confused with mere uniformity and should not be allowed to become an impediment to the introduction of improved accounting standards. It is not appropriate for an entity to continue accounting in the same manner for a transaction or other event if the policy adopted is not in keeping with the qualitative characteristics of relevance and reliability. It is also inappropriate for an entity to leave its accounting policies unchanged when more relevant and reliable alternatives exist.

Because users wish to compare the financial position, financial performance and cash flows of an entity over time, it is important that the financial report show corresponding information for the preceding periods. Enhancing qualitative characteristic

Verifiability

An enhancing qualitative characteristic that enables different knowledgeable and independent observers to reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Enhancing qualitative characteristic

The Conceptual Framework provides the following guidance [Conceptual Framework 2.30 – 2.32]:

Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable. A range of possible amounts and the related probabilities can also be verified.

Timeliness

An enhancing qualitative characteristic possessed by information that is available to decision-makers in time to be capable of influencing their decisions.

The Conceptual Framework provides the following guidance [Conceptual Framework 2.33]:

Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is. However, some information may continue to be timely long after the end of a reporting period because, for example, some users may need to identify and assess trends.

Management may need to balance the relative merits of timely reporting and the provision of reliable information. To provide information on a timely basis it may often be necessary to report before all aspects of a transaction or other event are known, thus impairing reliability. Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use to users who have had to make decisions in the interim. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the economic decision-making needs of users.

Understandability

An enhancing qualitative characteristic possessed by financial information that is classified, characterised and presented clearly and concisely.

The Conceptual Framework provides the following guidance [Conceptual Framework 2.34 – 2.36]:

Classifying, characterizing and presenting information clearly and concisely makes it understandable.

Some phenomena are inherently complex and cannot be made easy to understand. Excluding information about those phenomena from financial reports might make the information in those financial reports easier to understand. However, those reports would be incomplete and therefore possibly misleading.

Just some more words on this – An essential quality of the information provided in financial reports is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. However, information about complex matters that should be included in the financial report, because of its relevance to the economic decision-making needs of users, should not be excluded merely on the grounds that it may be too difficult for certain users to understand.

See also: Conceptual framework for Financial Reporting 2018

Enhancing qualitative characteristic

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