What are more qualitative characteristics that enhance the usefulness of information that already qualifies as relevant and providing a faithful representation?
The enhancing qualitative characteristics may also help determine which of two ways should be used to depict a phenomenon if both are considered to provide equally relevant information and an equally faithful representation of the substance of the financial outcome of transactions in a business model.
The enhanced qualitative characteristics are:
- Timeliness, and
Comparability More details to present Useful Financial Information
From Merriam-Webster: A definition of Comparability is the quality or state of being comparable. An example in a sentence explains it all:
“there’s little comparability between the two vehicles: one’s basic transportation and the other’s a luxurious salon on wheels”
The example sentence explains the challenge for Financial reporting. General purpose financial reports are not useful to users that want to choose between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.
So comparison is about (at least) two items that are reviewed and (more or less) judged about, what are the differences and what does this mean for my decision?
Comparability and consistency do not match. Consistency is using the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Comparability is the goal; consistency helps to achieve that goal.
However, comparability does not imply rigid uniformity. Comparability of financial information is not enhanced by making unlike things look alike any more than it is enhanced by making like things look different.
A faithful representation of a relevant substance of the financial outcome of transactions in a business model should naturally possess some degree of comparability with a faithful representation of a similar relevant substance of the financial outcome of transactions in a business model by another reporting entity.
Verifiability More details to present Useful Financial Information
From Merriam-Webster: A definition of verifiable is capable of being verified. An example in a sentence explains it all:
” we’re not sure whether that’s a verifiable hypothesis”
The accounting rules are designed to produce accounting information that investors, regulators and the public can understand and trust as truthful representations of a company’s financial condition. One of the key principles behind those accounting rules is verifiability: the ability to see how a company arrives at a certain result from the data it provides.
A company’s accounting results are verifiable when they’re reproducible, so that, given the same data and assumptions, an independent accountant can produce the same result the company did. Say your business lists a piece of equipment as an asset worth €10,000. If you told an outside accountant how much the equipment originally cost, how old it is, and what schedule you used to depreciate the equipment, that accountant should come up with the same figure. If not, the result isn’t verifiable.
Timeliness More details to present Useful Financial Information
From Merriam-Webster: A definition of timeliness is coming early or at the right time. An example in a sentence explains it all:
“She always responds to my requests in a timely fashion.”
Timeliness principle in accounting refers to the need for accounting information to be presented to the users in time to fulfill their decision making needs.
Timeliness of accounting information is highly desirable since information that is presented timely is generally more relevant to users while conversely, delay in provision of information tends to render it less relevant to the decision making needs of the users. Timeliness principle is therefore closely related to the relevance principle.
Timeliness is important to protect users from basing their decisions on outdated information. Imagine the problem that could arise if a company was to issue its financial statements to the public after 12 months of the accounting period. The users of the financial statements, such as potential investors, would probably find it hard to assess whether the present financial circumstances of the company have changed drastically from those reflected in the financial statements.
Understandability More details to present Useful Financial Information
From Merriam-Webster: A definition of understandability is to have thorough or technical acquaintance with or expertness in the practice of IFRS. An example in a sentence explains it all:
” I don’t understand how this is supposed to work.”
Understandability is the concept that financial statements should be presented so that a reader can easily comprehend it. This concept assumes a reasonable knowledge of business by the reader, but does not require advanced business knowledge to gain a high level of comprehension. Adherence to a reasonable level of understandability would prevent an organization from deliberately obfuscating financial information in order to mislead users of its financial statements.