Qualitative Characteristics of Accounting Information
Financial reporting
The primary objective of financial reporting is to provide useful information for making business decisions.
Useful accounting information should possess two fundamental qualitative characteristics:
- 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. - 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.