Qualitative Characteristics of Accounting Information The Conceptual Foundation of Accounting

For example, if net income and its components confirm investor expectations about future cash-generating ability, then net income has feedback value for investors. This confirmation can also be useful in predicting future cash-generating ability as expectations are revised. The information must be relevant to the needs of the users, which is the case when the information influences their economic decisions. This may involve reporting particularly relevant information, or information whose omission or misstatement could influence the economic decisions of users. However, in another study conducted by FASB (USA) to know the participants’ views about the importance of the qualitative characteristics of financial statement data, the following ranking were obtained. However, the answer to that question will usually be affected by the nature of the item; items too small to be thought material, if they result from routine transactions, may be considered material if they arise in abnormal circumstances.

After adopting the IFRS, a five- dimensional survey was developed based on the NiCE quality scale. The results indicated that the upper and middle management, in general, perceives that the qualitative characteristics of companies are very good. In addition, there are differences in the respondents’ perception of the quality of accounting information according submitting reports and invoices to the characteristics of their work background. Several years ago, accountants used the term reserve for doubtful accounts to describe anticipated bad debts related to accounts receivable. For many, the term reserve means that a sum of money has been set aside for future bad debts. Because this was not the case, this term lacked representational faithfulness.

Qualities of Accounting Information

Reliable information is required to judge a firm’s earning potential and financial position. Some data items presented in an annual report could also be more reliable than others, which is an essential part of qualitative characteristics of accounting information. The above mentioned characteristics (relevance, materiality, understandability, comparability, consistency, reliability, neutrality, timeliness, economic realism) make financial reporting information useful to users. These normative qualities of information are based largely upon the common needs of users. According to FASB and IASB (2010), qualitative characteristics are those attributes that make financial information useful.

Feedback reports on past activities and can make a difference in decision making by (1) reducing uncertainty in a situation, (2) refuting or confirming prior

expectations, and (3) providing a basis for further predictions. Remember that although accounting information may possess

predictive value, it does not consist of predictions. IASB and FASB are working on a joint project to develop a common conceptual framework. Quality refers to the credibility of the accounting information that is contained in the financial reports and the degree of its benefit to users. Also, it must be prepared in light of a set of legal, directorial, professional, and technical standards in order to achieve the purpose of its use (Alsalim, Amin, & Youssef, 2018).

Primary Users of Accounting Information

A study disclosed that there was an existing gap in terms of the qualitative characteristics of accounting information between the investors and external auditors. Adherence to these qualitative characteristics is crucial for

companies to communicate financial information effectively to their

stakeholders. These characteristics ensure that financial information is

useful, reliable, and relevant to decision-making and that it can be compared

to similar information over different time periods or entities. Because of those variations, verifiability or representational faithfulness components of reliability, might diminish. Whether there is a net gain to users of the information obviously depends on the relative weights attached to relevance and reliability (assuming, of course, that the claims made for current cost accounting are accepted). The possibility of error in measuring information and business events may create difficulty in attaining high degree of reliability.

Understandability of information is governed by a combination of user characteristics, and characteristics inherent in the information. Understandability (and other qualifies of the information), should be determined in terms of broad classes of users (decision-makers) rather than particular user groups. Predictive value here means value as an input into a predictive process, not value directly as a prediction.

Business Case Studies

In other words, the qualitative characteristics of the accounting information imply the quality attributes that accounting information should have in order to be useful to its users’. Qualitative characteristics are considered as a bridge between the objective of financial reporting and the concepts of recognition, disclosure, and measurement. And reliabilitythe extent to which information is verifiable, representationally faithful, and neutral.. No matter how reliable, if information is not relevant to the decision at hand, it is useless.

This characteristic is further divided into verifiability, timeliness, understandability. According to Backer, “different accounting methods are needed to reflect different management objectives and circumstances. Thus, consistency and uniformity in accounting methods would not necessarily bring comparability. That is, accounting information should not be limited to the interests of the average investor or sophisticated users but, in fact, information should be ordered and arrayed to serve a broad range of users.

Financial Performance

The quality of verifiability contributes to the usefulness of accounting information. It plays a main role in the qualitative characteristics of accounting information. Because verification aims to supply a big degree of assurance that accounting measures represent what they purport to portray.

One of the most important qualitative characteristics of accounting information is the reliability of data, i.e. all information provided must be traceable and verifiable with proper source documents. Many attempts have been made to examine the relative significance of (or possible conflict among) these qualitative characteristics. Some reports need to be prepared quickly, say in case of takeover bid or strike.

What are the fundamental qualitative characteristics of financial statements?

This attribute determines if the information is timely reported to the company, making the users’ decisions faster. Therefore, it is essential to consider the kind of data that would likely be most helpful to current and potential investors, lenders, and other creditors in making choices about the reporting company drafting these reports. Comparability of information refers to its ability to stand useful overtime and against the financial information from other sources. The practice of using the least optimistic estimate when two estimates of amounts are about equally likely.

• The objectives of (general purpose) financial reporting serve many different information users who have diverse interests, and no one predetermined result is likely to suit all users’ interests and purposes.
• The results showed that the reflection of the fundamental and enhanced qualitative characteristics in the financial reports was 66.1% and 70.8%, respectively.
• It has been established that the effect on earnings was the primary standard to evaluate materiality in a specific case.
• Companies must stick to these characteristics while preparing financial reports and statements.
• Reliability assumes the information being relied on is neutral with respect to parties potentially affected.

Hendriksen observes that the “primary objective of comparability should be to facilitate the making of predictions and financial decisions by creditors, investors and others”. He defines comparability as “the quality or state of having enough like characteristics to make comparisons appropriate”. Thus, understandable financial accounting information presents data that can be under-stood by users of the information and is expressed in a, form and with terminology adopted to the user’s range of understanding. Non-disclosure of limitations attached with information will mislead the users. It can be noted that the most reliable information may not be the most significant for users in making economic decisions and assessment of an enterprise’s earning power.