Qualitative characteristics of financial information include relevance, reliability, understandability, and comparability. These characteristics ensure consistency with national standards and provide relevant information for decision-making. Financial information must also be reliable, understandable, and comparable, with a necessary balance between relevance and reliability.
The qualitative characteristics that pertain to accounting or financial information represent the conceptual framework of the data. Four common characteristics include relevance, reliability, understandable, and comparable. Each allows a company to prepare financial information that is consistent with national standards. Businesses can also provide relevant information to make decisions to expand business operations. Qualitative characteristics may also be a requirement for information disclosed to the general public.
Relevance in terms of qualitative characteristics means that a company’s information is useful and timely. Each report prepared must have a specific time period attached to it. This ensures that an owner or manager can make decisions based on all the inputs and/or outputs of a specific time period. When collecting information for decision making, owners and managers can request a specific time period for their information. This will strengthen the relevance of the related data.
Financial information must have established reliability. Reliability indicates that all the information prepared does not include biases or opinions. For example, accountants may not be willing to report significantly negative information to senior executives. However, the accountant has a duty to provide information with the reliability that all the data is true and accurately reports the performance of a company. Information disclosed to the general public must have a high degree of reliability to avoid misleading investors.
Financial information must be understandable. Qualitative characteristics generally lead companies to prepare common statements, such as the balance sheet, income statement, and statement of cash flows. These statements are universal; therefore, they are usually easy to understand by all concerned. Internal reports must also have the same degree of understanding. Accountants or financial managers should take the same approach to preparing understandable reports for internal review.
Comparability means that companies can review and compare your financial information with other companies. Qualitative characteristics also dictate that comparable financial information allows for internal comparison. Owners and managers can review the current period compared to previous periods for trend analysis. This allows discovering increases and decreases in specific areas of the company.
There is a necessary balance in the qualitative characteristics. For example, relevance requires that information be timely. However, accountants may not have the time to prepare the information. The purpose becomes to provide reliable information in the amount of time provided. In these terms, reliability is more important than punctuality. Accountants must also ensure they adhere to standards that require neutral reporting mixed with prudent calculations.
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