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Qualitative characteristics of financial information (Enhancing…
Qualitative characteristics of financial information
If financial statements are to be useful to those who read and use the information they provide, they must satisfy certain criteria
The Conceptual Framework for Financial Reporting Separates the qualitative characteristics of financial information into fundamental and enhancing characteristics
Fundamental characteristics
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evelance
Financial information exhibits the characteristics of relevance when it can make a difference to the decisions that are made to its users
For the financial information to be capable of making a difference, it must also exhibit a predictive and/or confirmatory value
An example of the predictive and confirmatory value of financial information is sales revenue. The current year's sales revenue can be used to forecast next year's performance or to compare the forecast made for the current year in the previous reporting period
F
aithful representation
Financial information should represent economic phenomena in a complete, enteral and error free state
The reader and/or user of the financial information should have a complete picture of the phenomena to make their decisions
A faithful representation in isolation does not provide useful information
The fundamental characteristics are supported by four enhancing characteristics which serve to aid the usefulness of the financial information that is presented in financial statements to readers and users
Enhancing characteristics
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omparability
Enables users to identify and understand similarities in and differences among items within the financial statements of a reporting entity
For comparability to exist there must be at least two reported items
Comparability between years and different businesses
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erifiability
Enables that different knowledgeable and independent observers reach a consensus on whether a particular presentation of an economic phenomena has been faithfully represented
Verification can indirect or direct
Direct verification is verification via direct observations.
For example a physical stock count
Indirect verification may be conducted using the inputs to a financial model, formula or other technique and recalculating the outputs using the same methodology
An example is verifying the carrying amount of inventory by checking the inputs (quantities and costs) and recalculating the ending inventory using the same cost-flow assumption (ie first in, first out method)
U
nderstandability
Financial information that has been classified, characterised and presented in a clear and concise manner is deemed to be understandable
The exclusion of information because of its degree of complexity to enhance understandability renders such information to be incomplete and misleading for the purpose of its users
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imeliness
The ability to provide users with financial information to be able to influence their decision making process
In general, the older the information, the less useful it will be to users
Older information is not discarded because users require it to examine and assess trends in the behaviour of some items within financial statements
The qualitative characteristic of materiality has not become redundant in the Conceptual Framework but a recognition that materiality is an entity-specific feature of relevance
It is not possible to provide general terms to address each case of materiality, as materiality is dependent upon the nature or magnitude of the item to which the financial information relates. The issue of materiality should be examined on a case-by-case basis
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each
F
or
T
o
V
enus
U
ranus
C
ontinue