What are the fundamental characteristics of financial statements?
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Financial information has several qualities that make it useful. These qualities are outlined in Chapter 3 of the Conceptual Framework for Financial Reporting, approved by the International Accounting Standards Board (IASB). Show
Fundamental Qualitative Characteristics1. RelevanceRelevant information is capable of making a difference in the decisions made by users. Relevance requires financial information to be related to an economic decision. Otherwise, the information is useless. Financial information is useful if it has predictive value and confirmatory value. Predictive value helps users in predicting or anticipating future outcomes. Confirmatory value enables users to check and confirm earlier predictions or evaluations. Materiality is an aspect of relevance which is entity-specific. It means that what is material to one entity may not be material to another. It is relative. Information is material if it is significant enough to influence the decision of users. Materiality is affected by the nature and magnitude (or size) of the item. 2. Faithful RepresentationThe financial information in the financial reports should represent what it purports to represent. Meaning, it should reflect what really happened, with the correct financial values. There are three characteristics of faithful representation: 1. Completeness (adequate or full disclosure of all necessary information), 2. Neutrality (fairness and freedom from bias), and 3. Free from error (no inaccuracies and omissions). Enhancing Qualitative Characteristics1. ComparabilityComparable information enables comparisons within the entity and across entities. When comparisons are made within the entity, information is compared from one accounting period to another. For example: income is compared for the years 2019, 2020, and 2021. Comparability of information across entities enables analysis of similarities and differences between different companies. 2. VerifiabilityVerifiability helps to assure users that information represents faithfully what it purports to represent. Financial information is supported by evidence and independent individuals can check them to see whether such information is faithfully represented. In other words, information is verifiable if it can be audited. 3. TimelinessTimeliness means providing information to decision-makers in time to be capable of influencing their decisions. It shouldn't be significantly delayed or else it will be of little or no value. 4. UnderstandabilityUnderstandability requires financial information to be understandable or comprehensible to users with reasonable knowledge of business and economic activities. To be understandable, information should be presented clearly and concisely. However, it is improper to exclude complex items just to make the reports simple and understandable. Key Takeaways Fundamentally, financial statement information needs to be 1) relevant and 2) faithfully represented. Faithful representation means that information is complete, neutral, and free from bias. The quality of financial statements is enhanced by comparability, verifiability, timeliness, and understandability. Web link APA format Qualitative characteristics of financial information
(2022). Accountingverse. Next Lesson → Previous Lesson ← Chapter Outline ≡ Qualitative characteristics are the attributes that make financial information useful to users. For Analytical purposes, Qualitative characteristics can be differentiated into Fundamental and Enhancing qualitative characteristics. FUNDAMENTAL QUALITATIVE CHARACTERISTICS Fundamental Characteristics distinguish useful financial reporting information from that is not useful or misleading. The two fundamental Qualitative characteristics are :
Relevance: In accounting, the term relevance means it will make a difference to a decision maker. Relevant information is capable of making a difference in the decisions made by users. It is capable of making a difference in decisions if it has predictive value, confirmatory value , or both. Predictive value helps users in predicting or anticipating future outcomes. Confirmatory value enables users to check and confirm earlier predictions or evaluations. For example, in the decision to replace an equipment that has been used for the past six years, the original cost of the equipment does not have relevance. In other words, the original cost is irrelevant or is not relevant in the decision to replace the equipment. What will have relevance are the future amounts, such as the cost of the new equipment, and the savings that will occur when the old equipment is replaced. Here's another expression of relevance: Costs that will differ among alternatives. Costs that will not differ among alternatives do not have relevance. In order to have relevance, accounting information must be timely. Financial statements issued three weeks after the accounting period ends will have more relevance than financial statements issued several months after the period ends. Having timeliness and relevance may mean sacrificing some precision or reliability. The Relevance of information is affected by its nature and its materiality. Materiality : Information is material if omitting it, or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. Materiality is an aspect of relevance which is entity-specific. It means that what is material to one entity may not be material to another. It is relative. Information is material if it is significant enough to influence the decision of users. Materiality is affected by the nature and magnitude (or size) of the item. Faithful Representation is the second Fundamental Qualitative Characteristic. Faithful Representation The Financial reports represent economic phenomena in words and numbers. The financial information in the financial reports should represent what it purports to represent. Meaning, it should show what really are present (Example: Position of Assets and Liabilities) and what really happened (Example: Position of Income and expenditure), as the case may be. There are three characteristics of faithful representation: 1. Completeness: Depiction of all necessary information for a user to understand the phenomenon being depicted. It includes all necessary descriptions and explanations (adequate or full disclosure of all necessary information), 2. Neutrality: Depiction is without bias in the selection or presentation of Financial information uust not be manipulated in any way in order to influence the decision of users. (fairness and freedom from bias), We often refer to a term called True and Fair View in Accounting. 3. Free from error: means there are no errors and inaccuracies in the description of the phenomenon and no errors made in the process by which the financial information was produced. (no inaccuracies and omissions). That does not mean no inaccuracies can arise, particularly in case of making estimates. The standards expect that the estimates are made on a realistic basis and not arbitrarily. ENHANCING QUALITATIVE CHARACTERISTICS Enhancing Qualitative Characteristics distinguish more useful information from less useful information. The Enhancing Qualitative Characteristics are divided into 4 attributes.
COMPARABILITY Comparability is the Qualitative characteristic that enables users to identify and understand similarities in and differences among items. Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about other entities and with similar information about the same entity for another period or date. Comparable information enables comparisons within the entity and across entities. When comparisons are made within the entity, information is compared from one accounting period to another. For example: income is compared for the years 2014, 2015, and 2016. Comparability of information across entities enables analysis of similarities and differences between different companies. Corresponding information for preceding periods should be shown to enable comparison over time. Consistency vs. Comparability Consistency is not the same as Comparability. Consistency refers to the use of the same methods for the same items (Consistency of Treatment) either from period to period within a reporting entity or in a single period across entities. Users must be able to distinguish between different accounting policies in order to be able to make a valid comparison of similar items in the accounts of different entities. VERIFIABILITY A company's accounting results are verifiable when they're reproducible, so that, given the same data and assumptions, an independent accountant can produce the same result the company did. Verifiability helps assure that Information faithfully represents the economic phenomena it purports to represent. It means that different knowledgeable and observers could reach consensus that a particular depiction is a Faithful Representation. Verifiability isn't about determining whether the assumptions a company makes are correct. Rather, it's about determining whether the accounting result the company reaches is appropriate for the data, given the assumptions that have been made. The Financial Accounting Standards Board, which writes the rules for the U.S. accounting profession, says that verifiability provides assurance that "accounting measures represent what they purport to represent." It's not enough for a company to say the answer is "2." It also has to show you the "1 + 1" on the other side of the equation. Verifiability. Verifiability has its own limitations too.
TIMELINESS The timeliness of accounting information refers to the provision of information to users quickly enough for them to take action. Information becomes obsolete and useless if it is not reported within time. Usually the Statute specifies the time for preparation and presentation of Financial reports. UNDERSTANDABILITY Classifying, Characterising presenting information clearly and concisely makes it Understandable. A principle which states that a company's financial information should be presented in such a way that a person with a reasonable knowledge of business and finance, and the willingness to study the information, should be able to comprehend it. This principle is included in the Accounting Standards Board's Statement of Principles. by Shyam Sunder Kasturi Source : ACCA Study Material What are the characteristics of financial statements?What makes a financial statement useful? FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
What are the fundamentals of financial statements?They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
What are the fundamental characteristics of financial statements according to IFRS?The fundamental qualitative characteristics are relevance and faithful representation.
What are the 3 fundamental financial statements?The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
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