The qualitative characteristics of the conceptual framework are the attributes that make financial information useful to users. These characteristics help ensure that financial statements provide relevant and faithfully represented information.
According to the reference provided, the qualitative characteristics are divided into two main categories: fundamental and enhancing.
Fundamental Qualitative Characteristics
These are the essential characteristics that financial information must possess to be useful. The reference explicitly states that Relevance and faithful representation remain as the two fundamental qualitative characteristics.
Relevance
Relevant financial information is capable of making a difference in the decisions made by users. Information is relevant if it has predictive value, confirmatory value, or both.
- Predictive Value: Helps users forecast future outcomes.
- Confirmatory Value: Confirms or changes prior expectations.
- Materiality: A component of relevance. Information is material if omitting or misstating it could influence decisions that users make based on the financial information.
Faithful Representation
Faithful representation means that financial information accurately depicts the economic phenomena it purports to represent. To be faithfully represented, information must be:
- Complete: Includes all information necessary for users to understand the phenomenon being depicted.
- Neutral: Without bias in selection or presentation.
- Free from Error: Accurate, with no errors or omissions in the description of the phenomenon, and no errors in the process used to produce the reported information.
Enhancing Qualitative Characteristics
These characteristics enhance the usefulness of financial information that is relevant and faithfully represented. The reference states, "The four enhancing qualitative characteristics continue to be timeliness, understandability, verifiability and comparability."
Timeliness
Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Providing information sooner rather than later increases its capacity to influence decisions.
Understandability
Understandability means that financial information is classified, characterised, and presented clearly and concisely. While some phenomena are inherently complex, financial reports should aim to make the information as easy to understand as possible for users who have a reasonable knowledge of business and economic activities.
Verifiability
Verifiability helps assure users that information represents faithfully the economic phenomena it purports to represent. It means different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
Comparability
Comparability enables users to identify and understand similarities in, and differences among, items. It requires consistency in applying accounting methods over time and across different entities.
Summary Table of Qualitative Characteristics
| Category | Characteristic | Description |
|---|---|---|
| Fundamental | Relevance | Capable of influencing user decisions (has predictive/confirmatory value). |
| Faithful Representation | Accurately depicts economic phenomena (complete, neutral, free from error). | |
| Enhancing | Timeliness | Available to users in time to influence decisions. |
| Understandability | Clearly and concisely presented. | |
| Verifiability | Different knowledgeable observers can agree it is faithfully represented. | |
| Comparability | Allows users to identify similarities and differences across entities/periods. |
Understanding these characteristics is crucial for both preparers and users of financial statements, as they guide the development of accounting standards and the assessment of financial information quality.
