ACCOUNTING Midterms

Qualitative Characteristics

the qualities or attributes that make financial accounting information useful to users

Types of Qualitative Characteristics

Fundamental qualitative characteristics and Enhancing qualitative characteristics

What are the fundamental qualitative characteristics?

Relevance and Faithful representation

Application of qualitative characteristics

1. Identify whether a transaction has the potential to be useful

2. Identify the type of information about the transaction that would be most relevant and can be faithfully represented

3. Determine whether information is available

Relevance

capacity of information to influence a decision

Ingredients of relevance

Predictive value, Confirmatory value

Predictive value

if it can be used as input by users in predicting future outcome

Confirmatory value

if the information provides feedback about previous evaluations, when it enables users to confirm or correct earlier expectations

Materiality

Information is material if omission, misstatement, or obscuring of it affects the decision making of primary users

Factors of materiality

Size of item in relation to total of group to which it belongs

Nature of the item

Primary users

existing and potential investors, lenders, and other creditors

Faithful representation

figures must match what really happened

Ingredients of faithful representation

Completeness, Neutrality, Free from error

What should financial statements be accompanied by to be complete?

Financial statements should be accompanied by notes in order to be complete

Neutrality

without bias in the preparation and presentation of financial statements

Enhancing qualitative characteristics

relate to presentation or form of financial information

Comparability

the ability to bring together for the purpose of noting points of likeness and difference

Understandability

information must be comprehensible or intelligible if it is to be most useful

Verifiability

if different and knowledgeable and independent observers reach similar conclusions based on the information

Types of verification

Direct - through direct observation, e.g. counting cash

Indirect - checking inputs to a model, formula and recalculating inputs

Timeliness

must be available or communicated early enough when decisions are to be made