QUALITATIVE CHARACTERISTICS

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

The four principal qualitative characteristics are the following:

• Understandability 

• Relevance 

• Reliability 

• Comparability 

Understandability 

Users are assumed to have a reasonable knowledge of business and economic activities and accounting and willingness to study the information with reasonable diligence. 

Relevance 

Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present and future events confirming, or correcting, their past evaluations.

The following describes the relevance of financial information: 

• Materiality

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatements.  

• Predictive Value

Accounting information should be helpful to external decision makers by increasing their ability to make predictions about the outcome of future events. 

• Feedback Value

Accounting information should be helpful to external decision makers who are confirming past predictions or making updates, adjustments, or corrections to predictions. 

• Timeliness

Accounting information must be available on time when needed if it is to influence decisions.  Lack of timeliness reduces relevance.  Information is useless if not available when needed.  

Reliability 

Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which is either purports to represent or could reasonably be expected to represent.

• Faithful representation

A statement of financial position should represent faithfully the transactions and other events that result in assets, liabilities and equity of the entity at the reporting date which meet the recognition criteria.

• Substance over form

If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. 

• Prudence

Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.

• Completeness

To be reliable, the information in financial statements must be complete within the bounds of materiality and cost.  An omission   can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance.

• Neutrality

To be reliable, the information contained in financial statements must be neutral, that is, free from bias.

Comparability 

Users must be able to compare the financial statements of an entity through time in order to identify trends in its financial position and performance.  Users must be able to compare the financial statements of different entities in order to evaluate their relative financial position, performance and changes in financial position. 

Consistency

The reported accounting information should conform to procedures and methods that remain unchanged from one period to another.  Comparisons over time are difficult unless there is consistency in the way accounting principles are applied across fiscal years.

Source : IFRS-PFRS