ACCOUNTING Midterms

Chapter 3: Qualitative Characteristics

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

There are two types: (According to the Conceptual Framework for Financial Reporting)

Fundamental Qualitative Characteristics

relate to the content or substance of financial information

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

Information should be related or pertinent to the economic decision

Information that does not bear on a decision is useless

Ingredients of relevance

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

Information has predictive value when it can help users increase likelihood of correctly or accurately predicting or forecasting outcome of events

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

Materiality

also known as doctrine of convenience

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

Factors of materiality:

size and nature of an item

Primary Users

existing and potential investors, lenders, and other creditors

Faithful Representation

figures must match what really happened

Ingredients:

Completeness - should be presented in a way that facilitates understanding and avoids erroneous implication

shall be accompanied by notes in order to adhere to completeness

Full disclosure; all significant and relevant info leading to preparation of financial statements must be reported

Neutrality - without bias in the preparation and presentation of financial statements

Prudence is the exercise of care and caution when dealing with uncertainties in the measurement process

Assets or income are not overstated, and liabilities or expenses not understated

Conservatism - when alternatives exist, the alternative with the least effect on equity should be chosen

In case of doubt, record any loss and do not record any gain

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