Qualitative Characteristics of Useful Financial Information
For financial information to be of any use to investors, creditors, and other stakeholders, it must exhibit certain required and desired attributes. These attributes are called qualitative characteristics of useful financial information.
The IASB and FASB have identified these characteristics in their conceptual frameworks because these guide their standard-setting process.
Qualitative characteristics of useful financial information are categorized into fundamental qualitative characteristics and enhancing qualitative characteristics.
Fundamental qualitative characteristics
Fundamental qualitative characteristics are those whose absence makes financial information no longer useful. Relevance and faithful representation are the fundamental qualitative characteristics.
Relevance gives financial information the capability of making a difference in decisions made by users. Such capability arises when the information has either predictive value, confirmatory value, or both. Relevance is applicable in the context of materiality. Materiality is the quality of financial information which makes its omission or misstatement significant enough to impact the decisions that users make through reliance on the information. Materiality acts as a filter on relevant information such that relevant information is useful only when it is material.
Faithful representation is achieved when financial information truthfully represents the underlying economics of a phenomena. This is achieved when information is complete, neutral (without any understatement or overstatement bias) and free from error (at least in the process used to produce the information).
Enhancing qualitative characteristics
Enhancing qualitative characteristics improve usefulness of financial information. However, neither do they compensate for lack of relevance or faithful presentation nor their absence make the information useless. They help decide between two equally relevant and true and faithful accounting choices for a single transaction. Preparers of financial information must achieve to maximum enhancing qualitative characteristics.
Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability.
Comparability requires financial information to be comparable across periods and companies. Comparability is achieved through consistency.
Verifiability is the property which enables different knowledgeable users to agree that particular financial information exhibits truthful representation. It improves usefulness of financial statements because it assures users that they are indeed true and fair.
Timeliness is achieved when financial information is made available early enough for it to impact decisions made by the users.
Understandability requires financial information to be classified, characterized and presented such that it can be understood by users with reasonable knowledge of business and economic activities.