Summary

‘Good’ accounting information should be ‘useful’

• to users
• who make financial decisions

Fundamental qualitative characteristics

• relevant
• faithful representation

Enhancing qualitative charactistics

• comparable
• verifiable
• timely
• understandable

Our best guide to the qualitative characteristics of useful financial information is the IASB’s Conceptual Framework for Financial Reporting – most recent version, 2018

The qualitative characteristics apply equally to financial information in general purpose financial reports as well as to other forms of financial information.

According to the IASB financial information is useful when it is

Relevant and represents faithfully what it purports to represent – fundamental qualitative characteristics

Usefulness is further enhanced if it is comparable, verifiable, timely and understandable.

Fundamental qualitative characteristics

Relevance

Financial information is relevant if it could make a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has

• predictive value
• confirmatory value
• or both.

The predictive value and confirmatory value of financial information are interrelated.

Materiality is recognised as an entity-specific aspect of relevance based on the nature and/or magnitude of the items to which the information relates in the context of an individual entity’s financial report.

Faithful representation

To be useful must also represent faithfully the phenomena it purports to represent.

This means representation of the substance of an item not just its legal form.

A faithful representation seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error.

A neutral depiction is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements where there is uncertainty.

Applying the fundamental qualitative characteristics

Information which is not relevant and faithfully represented is not useful useful.

Enhancing qualitative characteristics

These are:

• comparability
• verifiability
• timeliness
• understandability

Comparability

Information about a reporting entity is more useful if it can be compared with other entities and for earlier periods.

Verifiability

Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could agree that a particular depiction is a faithful representation.

Timeliness

Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions.

Understandability

Information should be clear and concise. However, some information is inherently complex and cannot be made easy to understand. This should not be excluded if it would make financial reports incomplete and potentially misleading. Financial reports are prepared for users. It must be assumed that users have a reasonable knowledge of business and economic activities exercise diligence.

Applying the enhancing qualitative characteristics

Enhancing qualitative characteristics should be maximised to the extent necessary. However, information that is irrelevant or not represented faithfully cannot be useful.

Cost constraints

Ceneral purpose financial reporting imposes costs and those costs should be justified by the benefits of reporting that information. The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities.