1. Qualitative Characteristics of Financial Information
Qualitative characteristics are the attributes that make financial statement information useful. The
Conceptual Framework splits these into two categories:
Fundamental Qualitative Characteristics
1. Relevance
o
Information is relevant if it influences users' economic decisions and is provided in
time to do so.
o
Materiality affects relevance—information is material if omitting or misstating it
could influence decisions.
Example: If a company has a pending lawsuit that could significantly impact its finances, disclosure of
this information ensures relevance.
2. Faithful Representation
o
Financial information should accurately depict the transactions and events it
represents.
o
Key aspects:

Completeness: All necessary descriptions and explanations should be
included.

Neutrality: Information must be free from bias and should not be
manipulated to achieve a specific result.

Free from Error: While absolute precision is not always possible, estimates
should be clearly described as such.
Example: A company leasing a building for 10 years must recognize the lease liability and right-of-use
asset under IFRS 16 rather than just showing rent expenses, ensuring faithful representation.
Enhancing Qualitative Characteristics
1. Comparability
o
Users must be able to compare financial statements over time and across different
entities.
o
Consistency in applying accounting policies enhances comparability.
Example: If Company A follows FIFO for inventory valuation while Company B follows LIFO, their
financial statements may not be easily comparable.
2. Verifiability
o
Information is verifiable when independent observers can reach a consensus that it
faithfully represents what it purports to represent.
o
Verification can be direct (e.g., counting cash) or indirect (e.g., recalculating an
estimate using the same inputs and methodology).
Example: An auditor verifying inventory by physically counting stock provides direct verification.
3. Timeliness
o
Information must be available to decision-makers in time to influence their choices.
o
Older information is generally less useful.
Example: A company publishing its financial statements six months late may render the data less
useful to investors.
4. Understandability
o
Information should be presented clearly and concisely so that users with reasonable
knowledge can comprehend it.
o
The complexity of financial reporting should be balanced against the need for full
disclosure.
Example: Clear notes explaining how revenue is recognized help users understand financial
statements better.
2. Other important accounting concepts
There are a number of other accounting principles that underpin the preparation of financial
statements. The most significant ones include:
Materiality
An item is regarded as material if its omission or misstatement is likely to change the perception or
understanding of the users of that information — i.e. they may make inappropriate decisions based
upon the misstated information. Note that this is a subjective assessment made by those who
prepare the financial statements (usually company directors) and it requires them to consider the
reliability of the financial statements for decision-making purposes by users, principally the
shareholders.
Example: If the bank balance of a large company is misstated by $1 in the statement of financial
position, it may not be considered material. However, if it is misstated by $100,000, it is more likely
to be considered material as it significantly distorts financial information.
Substance over form
As noted earlier, if information is to be presented faithfully, the economic reality must be accounted
for and not just the strict legal form.
Example: Redeemable preference shares, although legally classified as shares, are treated as debt in
accounting because they carry an obligation to repay shareholders.
The going concern assumption
Financial statements are prepared on the assumption that the entity is a going concern, meaning it
will continue to operate for the foreseeable future. The normal expectation is that the business will
continue operating for the next twelve months. However, unexpected financial difficulties may
challenge this assumption.
Example: If a company is facing serious financial distress and is unlikely to continue operations, its
assets may need to be valued at their liquidation values instead of their going concern values.
The business entity concept
This principle means that financial accounting information relates only to the business and not to the
personal finances of the owner. The business is treated as a separate entity from its owners.
Example: If the owner of a sole proprietorship withdraws money for personal expenses, this is
recorded as a drawing rather than a business expense.
The accruals basis of accounting
Transactions are recorded when revenues are earned and expenses are incurred, regardless of when
cash is received or paid.
Example: If a company delivers goods to a customer in December but receives payment in January,
the revenue is recognized in December.
Prudence
Preparers of financial statements should exercise caution. Assets and income should not be
overstated, while liabilities and expenses should not be understated.
Example: If a company expects a customer to default on a payment, it should create a provision for
doubtful debts rather than waiting for the default to occur.
Consistency
Users need to be able to compare financial performance over time, so the presentation and
classification of items should remain consistent unless a change is required by a new IFRS Standard.
Example: If a company changes its method of inventory valuation from FIFO to weighted average
cost, it should disclose this change and its impact on financial statements.