Qualitative characteristics of financial information

Qualitative Characteristics of Financial Information

Understandability

  • Financial information must be presented in a manner that is simple and easy to understand for stakeholders. The data should be free from complexity for non-specialist users to grasp the meaning.

  • However, this does not mean oversimplifying complex transactions. Stakeholders are assumed to have a reasonable knowledge of business and economic activities.

Relevance

  • Financial information must be relevant to meet the needs of stakeholders making economic decisions.

  • Information has the potential of making a difference in users’ decisions only when it is relevant.

Materiality

  • Materiality is a subset of relevance. An item is considered material if its omission or misstatement could influence economic decisions of users.

  • The materiality threshold is a matter of judgement and depends on the size of the error judged in the particular circumstances of its omission or misstatement.

Comparability

  • The financial information should be consistent throughout time and also comparable with the financial information of other companies.

  • This allows users to identify and analyse trends in financial position and performance over time, as well as make comparisons between businesses.

Reliability (also known as Faithful Representation)

  • Reliability of information refers to the information being free from material error and bias and not misleading.

  • A key aspect of reliability is verifiability, meaning that different knowledgeable individuals would agree that the information faithfully represents what it claims to represent.

Timeliness

  • Financial information should be made available to decision-makers in time to be included in their decision-making process.

  • Delayed financial information may lose its relevance to guide decision making.

Understandability, relevance, reliability, timeliness, and comparability are all essential to facilitate the usefulness of financial statements. These characteristics ensure high-quality financial reporting.