Qualities of Financial Reporting

Fundamental Characteristics distinguish useful financial reporting information from that is not useful or misleading.

The two fundamental Qualitative characteristics are:

• Relevance
• Faithful Representation

Materiality: Information is material if omitting it, or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.

Materiality is an aspect of relevance which is entity-specific. It means that what is material to one entity may not be material to another. It is relative. Information is material if it is significant enough to influence the decision of users. Materiality is affected by the nature and magnitude (or size) of the item.

Faithful Representation

The Financial reports represent economic phenomena in words and numbers. The financial information in the financial reports should represent what it purports to represent. Meaning, it should show what really are present (Example: Position of Assets and Liabilities) and what really happened (Example: Position of Income and expenditure), as the case may be. 

Timeliness:

All the information in the financial statements must be provided within a relevant span of time. The disclosures must not be excessively late or delayed so that while making their economic decisions the users of these statements possess all the relevant and up-to-date knowledge. Although this characteristic may take more resources but still it is a vital characteristic as delayed information makes any corrective reactions irrelevant.

Reliability:

The information provided in the financial statements must be reliable and true. The information extracted to prepare these financial statements must be from reliable and trustworthy sources. The financial statements must depict the true and fair picture of the status of the company affairs. This means that the information provided must not have any significant errors or material misstatements. The transactions shown must be based on the concepts of prudence and must represent the true nature of company’s transactions and operations. The areas that are judgmental and subjective in nature must be presented with due care and keen competence.

Comparability:

The financial statements must be prepared in such a way that they are comparable with prior year financial statements. This characteristic of financial statements is very important to maintain, as it makes sure that the performance of the company could be monitored and compared. This characteristic is maintained by adopting accounting policies and standards that are applied are consistent from period to period and between different jurisdictions. This enables the users of the financial statements to identify and plot trends and patterns in the data provided, which makes their decision making easier.

Understandability:

The financial statements are published to address the shareholders of the company. So, it is important that these statements must be prepared in such a way that is easy to understand and interpret for the shareholders. The information provided in these statements must be clear and legible. For the sake of understandability, the management must consider not only the statutory data and information but also the voluntary information disclosures which would make financial statements easier to understand. The directors must elaborate the information provided in the statements where necessary.