| One of the main objectives of financial reporting is | | | | nature of information affect relevance as well. |
| to satisfy the information needs of a range of | | | | Materiality is one of the assumptions used in |
| users. In so doing, financial statements and | | | | financial reporting, but it merely contributes to |
| reports must have a framework. Financial | | | | relevance. |
| accounting is not just about getting your ledgers | | | | 3. Reliability |
| in order or creating financial reports, but involves | | | | The word "reliable" is easily understood, but its |
| a theoretical aspect that governs the production | | | | manifestation differs according to context. In the |
| of information for economic users. In the same | | | | context of accounting, reliable information is free |
| way that good accounting information has certain | | | | from material error (errors that affect the |
| characteristics, financial reports are bound to | | | | economic decisions of users) and bias. In other |
| possess certain qualitative characteristics. | | | | words, a reliable financial statement must fairly |
| The four main qualitative characteristics of | | | | and consistently present information about the |
| financial statements are:i) Understandabilityii) | | | | performance and financial position of an entity. |
| Relevanceiii) Reliabilityiv) Comparability | | | | Users must have confidence in the financial |
| There are other qualitative characteristics of | | | | statement, without it being misleading or |
| financial statements, but those four are the most | | | | deliberately constructed in a manner that presents |
| important, especially as they rely on fundamental | | | | the entity in a favourable light. |
| assumptions like consistency and fair presentation. | | | | 4. Comparability |
| These characteristics define what makes financial | | | | Imagine if you saw a financial statement from |
| statements useful to the users-whoever the | | | | one company and they prepared it differently |
| users may be. | | | | from other companies in the industry or even |
| 1. Understandability | | | | different from how they prepared it in previous |
| While you can argue that financial information is | | | | years. It is likely that the users would not be able |
| somewhat complicated for the uninitiated to | | | | to compare the statements among companies |
| understand, users must be able to understand the | | | | and over time. Comparability adds a degree of |
| information provided. This applies to the format/ | | | | transparency to financial statements by allowing |
| layout of the statement, to the terms used in the | | | | comparisons over time and among entities. |
| statement and the policies, methods and | | | | Comparability is affected by consistency of |
| assumptions utilized in preparing the statement. | | | | presentation and disclosure of accounting |
| Users of financial accounts are assumed to have | | | | policies-particularly when comparing items among |
| sufficient knowledge to study the information | | | | entities that might use different (but equally valid) |
| properly. Understandability ensures that a user | | | | methods like straight-line/ reducing balance |
| equipped with the basic knowledge can discern | | | | depreciation or FIFO/average cost method. This |
| information pertaining to the performance and | | | | indicates that comparable financial statements are |
| financial position of the enterprise. | | | | not necessarily uniform, but merely allow |
| 2. Relevance | | | | comparisons. |
| Since financial accounts are for users to make | | | | == Conclusion == |
| economic decisions, the information must be | | | | Besides understand ability, reliability, relevance and |
| relevant to the decisions that those users have to | | | | comparability, other qualitative characteristics of |
| make. By definition, irrelevant information cannot | | | | information include completeness, prudence, |
| be useful. Once all items in a financial statement | | | | neutrality, faithful representation and substance |
| helps users to assess historic or future events, | | | | over form. Sometimes, there exists a trade-off |
| the information in the statement relevant to the | | | | between or among qualitative characteristics. The |
| users. Whether the information affects the | | | | financial accountant usually exercises discretion |
| economic decisions of users (materiality) and the | | | | where any conflict might occur. |