Qualitative Characteristics of Accounting Information
These add a great deal of credibility to the accounting information.
What are the Qualitative Characteristics of Accounting Information?
The qualitative characteristics of accounting information are the attributes that make financial information useful and meaningful to users.
The accounting information present in the financial statements is primarily quantitative terms—numbers matter. And with these currency amounts and numbers, investors can make informed and profitable decisions.
However, along with the quantitative features, accounting information also has qualitative characteristics and data. These characteristics also add a great deal of credibility to the accounting information.
For surveying purposes, the features are classified into two categories:
- Fundamental qualitative characteristics
- Enhancing qualitative aspects
According to ACCA Global, financial reports comprise financial information. Therefore, it is essential to consider the kind of data that would likely be most helpful to current and potential investors, lenders, and other creditors in making choices about the reporting company drafting these reports.
If financial data is meaningful, it must timely and accurately reflect the reported information. In addition, if this information is comparable, verified, convenient, and conveniently intelligible, its usefulness will be increased.
According to Prabhjot Kaur, "Qualitative characteristics or qualities necessary for information serve a significant supporting role in the decision usefulness, decision model approach to accounting theory."
As stated by Prabhjot Kaur, "Accounting information that is reported to facilitate economic decisions should possess certain characteristics or normative standards known as qualitative characteristics of accounting information."
Companies must stick to these characteristics while preparing financial reports and statements. It helps the stakeholders to build or enhance trust with the management as they provide informed and timely reports without concealing any facts and information.
Key Takeaways
- Fundamental qualitative characteristics, such as relevance and reliability, are essential for making financial information valuable and trustworthy for decision-making.
- Enhancing qualitative characteristics, including verifiability, timeliness, understandability, and comparability, contribute to the usefulness and accessibility of financial information.
- These characteristics are critical for users of financial information, such as investors, creditors, and other stakeholders, in making informed and timely decisions.
- Companies must adhere to these qualitative characteristics while preparing financial reports to enhance trust and transparency with stakeholders.
Fundamental (Primary) Qualitative Characteristics
The characteristics that are necessary to make valuable information for the users to make decisions are defined as fundamental characteristics. The two essential features are:
1. Relevance
Relevance describes how valuable is the accounting information to the users for making decisions. The relevant information must be made accessible on time, predict and provide feedback, and positively impact the users' findings.
For information to be relevant, it requires:
- Confirmatory value - It must include information regarding past financial events and validate past predictions.
- Predictive value - It must predict future events by the users.
The information would be relevant if both the requirements were met and followed.
2. Reliability
To ensure the reliability of financial information, the users must be able to rely on the news. The information provided should be free from bias and faithfully portray what it is meant to represent. It is also known as a faithful representation of financial information.
To achieve faithful representation, the information must follow the following characteristics:
- Completeness - All transactions must be presented and follow entirely disclosure accounting principles.
- Neutrality - All information should be free from any bias and manipulation.
- Free from any error - The report is free from any errors and mistakes.
Enhancing (Secondary) Qualitative Characteristics
The attributes that influence the usefulness of the information by the users and distinguish between more practical and less helpful information are defined as Enhancing qualitative characteristics.
These characteristics include:
1. Verifiability
The organization must ensure that the financial information is verifiable for accurate predictions. This involves validating the financial information using several measures and assumptions to produce the same results.
Verifiability does not influence the sincerity of the information and does not provide any assurance on the premises or the methods used.
2. Timeliness
This attribute determines if the information is timely reported to the company, making the users' decisions faster.
3. Understandability
This characteristic states that the information should be presented in a way understandable to potential users and the general public.
Note
A message is believed to be communicated effectively when the receiver perceives and understands the news the same way the sender has sent it.
4. Comparability
It refers to the ability of the company to compare financial information with its competitors and make changes to facilitate decision-making by the users. The comparison is based on the assumptions, methods, accounting standards, and policies used in financial information.
Qualitative Characteristics Importance and Usage
Like the quantitative characteristics of accounting, these aspects have also developed their importance and helped enhance the accounting information and financial reports.
Both the quantitative and qualitative go hand-in-hand for the smooth functioning of the business as they have equal importance and requirements. Moreover, these characteristics assist the users of financial information in forming predictive and informed decisions on time.
Importance
These factors are essential for the following reasons:
- Relevance and dependability are two crucial qualitative aspects of accounting information that enable stakeholders to make knowledgeable financial decisions.
- Applying accounting principles consistently promotes comparability, which enables users to see patterns, evaluate performance, and make wise strategic decisions.
- Clear presentation and respect for qualitative features enable transparent financial reporting, which fosters stakeholder trust and lowers the possibility of misconceptions.
- To ensure wise decision-making and resource allocation, stakeholders rely on the qualitative aspects of accounting information to manage risks related to lending, investments, and business operations.
- The observance of qualitative attributes not only guarantees regulatory compliance but also bolsters the legitimacy and soundness of financial reporting, cultivating stakeholder trust in the accuracy of information revealed.
- Accounting information's qualitative features are crucial for encouraging accountability, openness, and stakeholder trust—all of which support effective resource allocation and maintain market liquidity.
Usage
The following steps should be followed to assist in using these characteristics:
- Derive relevant information from the financial statements of the company.
- Ensure the information is complete, neutral, and free from error.
- Ensure the information is verifiable, free from bias, and presents an unrealistic picture of the business.
- Ensure the understandability of the data by users and the general public.
- Compare the data with different periods and competitors.
Qualitative Characteristics Example
The following are some examples of the use of such characteristics of accounting information in the real business world.
1. If a company wants to invest in a new asset or improve its sales, it will first need to extract relevant information from the past years, facilitating timely and well-informed decision-making in achieving the goals.
2. The company will also ensure the information is reliable, i.e., complete, neutral, and free from errors or misrepresentation. Then, the company will ensure that the data is verifiable with the help of some professionals and their expertise.
3. The company will always ensure that professionals understand the information provided and that the general public is unknown to the specific sector.
4. While comparing the financial information between different companies or different economic periods of the same company, the qualitative factors assist in understanding and analyzing the data. The interpreted data is used for further comparing and making decisions.
5. The investors and creditors are waiting for the company's financial reports to come out, but the messages have been delayed by a few months due to unforeseen circumstances. Then, the decisions taken by the investors and creditors as to whether to invest or not in the business will be difficult as the information is not up to date and does not provide timely results.
Conclusion
The qualitative characteristics of accounting information play a crucial role in enhancing the value and reliability of financial reports.
These characteristics are divided into fundamental and enhancing qualities, each contributing to the overall usefulness of financial information for decision-making purposes.
Fundamental characteristics, such as relevance and reliability, ensure that the information provided is meaningful and trustworthy.
On the other hand, enhancing characteristics, including verifiability, timeliness, understandability, and comparability, further improve the utility and accessibility of financial data.
Qualitative Characteristics of Accounting Information FAQs
The two primary characteristics are relevance and reliability, which make valuable decision-making for the company and help distinguish between more practical and less helpful information.
According to the Financial Accounting Standards Board, clarity and usefulness are essential characteristics for fulfilling the utility requirement; relevance and reliability are considered technical characteristics.
There are three main types: binary, nominal, and ordinal.
- Binary data is the data represented numerically with zeroes and ones.
- Nominal data is the data used to label something without its numerical value.
- Ordinal data is the data that is represented in specific orders.
The qualitative data helps to recognize the intangible impact of different transactions in the company. There are several advantages and disadvantages, such as:
The pros are:
1. Feasible
2. Requires a small sample size
3. Predicts the future events
4. Provides material information to the users of the information
5. Unbiased
The cons are:
1. Time-consuming
2. It cannot be used over a large population
3. It relies on the knowledge of the researchers
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