This chapter explains the qualitative characteristics of useful financial information. The qualitative characteristics can be classified as fundamental (relevance and faithful representation) or boosting (comparability, verifiability, timeliness and understandability) established about how they effect the effectiveness of financial information. However, it can tied to two pervasive constraints which is cost and materiality in providing useful financial information.
1. Fundamental qualitative characteristics
I) Relevance
Relevant financial confirming information means the power of users (shareholder) to produce a difference in their decision. Information regarding to economic phenomenon can help the users change lives decision if it included predictive value and confirmatory value.
Predictive Value
Information has predictive value if the value can be handy to the shareholder in predicting certain things that is related to future. Information which is highly predictable does not necessary has predictive value. For instance, depreciation of herb and equipment by using right lines method can be highly predictable each year, but it cannot help out with evaluating the web cash flows.
Confirmatory value
Information has confirmatory value if it confirms the validity of preceding expectation or correcting them in line with the prior evaluations. The outcomes will be same as past expected if the information has proved past expectation while the end result can be altered if correcting in previous expectations happened.
ii) Faithful Representation
Useful financial information needs not only be a relevant but also be a faithful representation. Financial confirming information included the characteristics of complete, natural, and free from material error is meant to be faithful representation of an economic phenomenon. An individual description in financial reports may correspond to multiple monetary phenomena. For example, the seed and equipment presents in the balance sheet may stand for all the vegetable and equipment that possessed by entity.
Complete
Complete financial reporting information must have all the required information which is useful for decision making and should not be absent a material truth or consideration that would cause the financial confirming information misleading.
Neutrality
Neutrality in financial reporting information must get rid bias which the information provided does not favor to the particular group over other interested person. To be able to have neutral information, information must survey in faithful and trustworthiness condition without changing anything that have to be conveyed for the intended purpose of inducing someones habit.
Free from error
A set of financial reporting information is said to be true if the information is free from error. However, scheduled for some constraint and uncertainty in current economic climate phenomena, financial reporting information will not provide absolutely value which is totally free from error. Therefore, a various type of judgments and estimation predicated on appropriate input are being used by the management in evaluating the financial reporting.
Application of the Fundamental Qualitative Characteristics
Relevance is the essential qualitative attribute which linked to the financial phenomena and must be considered first before the other qualitative characteristics. Once the relevance is put on distinguish which economical phenomena should be provided, faithful representation is going to determine which characteristics are better to match the relevant phenomena. Therefore, relevance and faithful representation must work in a brand to provide useful financial information to the users.
2. Improving Qualitative Characteristics
Enhancing qualitative characteristics are additional profit added to the basic to enhance the decision effectiveness of financial information.
i) Comparability
Comparability refers to the power of the users to distinguish similarities and differences between two financial phenomena. Comparability between entities and uniformity in the application of methods or types of procedures as time passes period will improve the informational value in comparative economic performance. In order to maximize the fundamental qualitative characteristics, some degree of comparability should be included in relevant and faithful representation.
ii) Verifiability
Verifiability refers to the with the capacity of the users to ensure that the information faithfully represents what it purports to stand for and also to ensure the particular technique of measurement had been used is without bias and problem. The info is confirmed when the various evaluators or observers who are competent confirmed and come up with the same effect. Confirmation can be recognized as immediate or indirect. Immediate confirmation can be confirmed through an amount or other representation while indirect confirmation refer to the amount or other representation which is confirmed by examining the inputs and recount the outputs by adopting same accounting convention.
iii) Timeliness
Timeliness means that the info must be received by the users at the right time before it loses its capacity to affect your choice. Information should discover sufficient timeliness to give a definite and important picture for the shareholders. Information that is not available when it is needed by your choice designers will be unproductive and the information may lose its potential value.
iv) Understandability
Understandability means that the quality of financial information that the users could be able to identify or discover the interpretation of the communication that aiming to be shown. Users of financial statements are assumed to possess sufficient knowledge to study the info properly. If the info is classified, evidently represent and concise, it can help to enhance understandability. Sometimes, the information is complicated and hard to comprehend, the users may seek an consultant to explain to them.
Application of the Enhancing Qualitative Characteristics
Enhancing qualitative characteristics provide additional gain and effectiveness in the financial reporting information. Therefore, the four important characteristics which are comparability, verifiability, timeliness and understandability should be extent widely. However, the improving qualitative characteristics will be pointless if the financial information is irrelevant or not faithfully represented in important step. The application of the enhancing qualitative characteristics is redundant process that will not follow concern and prescribed order. Sometimes, one or a few of the enhancing qualitative characteristics will get up to increase the usefulness of another qualitative characteristic. If such situation happened, appropriate information or facts should be disclosed.
Constraints on Financial Reporting
i) Materiality
Materiality can be discussed as the amount of an omission or misstatement of financial reporting information that could influence the decision of users. Materiality is determined by the scale and character of the item judged in the light of the surrounding circumstances. It is hard to find out a consistent quantitative of which a specific information become material. To be able to provide a faithful representation and relevant financial information, materiality level should be build in order to detect material misstatement to avoid imperfect, biased, or not clear of mistake in financial reporting information.
ii) Cost
Cost is one of the pervasive constraints in providing useful financial reporting. The advantage of financial reporting imposes costs. Normally, management will have a tendency to use more qualitative alternatively than quantitative when evaluating and justify those costs in the benefit for financial reporting information. However, it is often imperfect and imperfect if using qualitative strategy to research cost and advantage of financial reporting. Cost of producing information such as cost of collecting, classifying, finalizing, verifying and disseminating should be established obviously. Besides, cost of omission and problem in decision making also need to be included. Shareholders and individual entities use financial reporting information to make decision and enjoy those benefits will lower the price tag on capital.
Application of the Constraints on Financial Reporting
Materiality is reported to be one of the pervasive constraint on financial reporting because it attribute to all or any the qualitative characteristics. For instance, materiality have to be assessed when determine the sufficiency of relevant information and sufficiency of complete, neutral, and clear of mistake to faithfully stand for in financial reporting. Software of the price constraint in financial reporting included evaluate if the benefits of confirming information will be able to impose the costs. It is necessary to think about whether one or some qualitative characteristics one or a few of the enhancing qualitative characteristics will get up to reduce the price.
