Enhancing Qualitative Characteristics


Qualitative characteristics are those features of financial information that make it useful to Decision makers. The three fundamental qualitative characteristics are Decision usefulness, objectivity, and understandability. The Enhancing qualitative characteristics are comparability, timeliness, and verifiability.

Decision usefulness is the ability of financial information to make a difference in Decision making. It is determined by factors such as relevance and faithful representation. Objectivity is the absence of bias in financial information. Understandability is the ease with which users can comprehend the information.

Comparability is the ability to compare financial information across different entities. Timeliness is the promptness of financial information. Verifiability is the degree to which financial information can be verified by an independent party.

The goal of general purpose financial reporting is to provide information about the entity that may be useful to existing and potential investors, lenders, and other creditors in determining whether or not to finance the organization.

In order to achieve that objective, financial statements need to be prepared in accordance with the generally accepted accounting principles (GAAP). The framework for GAAP is provided by Statements of Financial Accounting Concepts issued by the Financial Accounting Standards Board.

The framework provides guidance on the nature, function and limitations of financial accounting and reporting and consists of four overarching Concepts Statements. These are:

– Objectives of General Purpose Financial Reporting by Business Enterprises

– Qualitative Characteristics of Useful Financial Information

– Elements of Financial Statements

– Reporting Entity

The first three Concept Statements were originally issued in 1978 and amended in 2010. The fourth Statement was added in 1989.

The Concept Statements provide the foundation for all other pronouncements of the FASB.

The Qualitative Characteristics of Useful Financial Information Statement identifies the characteristics that make information useful to users for making economic decisions. It consists of two types of qualitative characteristics:

– Fundamental characteristics

– Enhancing characteristic

All else being equal, information that possesses more of the fundamental characteristics is expected to be more useful than information that does not have those characteristics. Similarly, all else being equal, information that has the enhancing characteristics is expected to be more useful than information without those characteristics.

The Framework 2010 identifies two basic qualitative qualities of valuable financial information: relevance and fidelity. Financial data must be both relevant and accurately represented in order to be useful. Comparability, verifiability, timeliness, and clarity are seen as improving qualitative characteristics. They make information more relevant and faithfully rendered.

Relevance is the capacity of information to make a difference in users’ decisions. Information is relevant if it has the potential to affect users’ decisions. All else being equal, the more relevant information is, the more useful it is. Faithful representation means that information faithfully represents what it purports to represent. In other words, information is faithful when it gives a true and fair view of the underlying transactions or events.

Comparability means that information can be compared with similar information about other entities over time or with different types of entities. Verifiability means that independent parties can agree on whether an assertion made about an economic phenomenon agrees with the available evidence. Timeliness means that information should be available to decision-makers in time for it to be used in their decision-making process. Understandability means that information should be understandable by users with a reasonable amount of time and effort.

The framework provides guidance on how to make financial information useful by identifying the qualitative characteristics that make up useful financial information. The qualitative characteristics provide a framework for thinking about what makes information useful to users. They also provide guidance on how to improve the usefulness of financial information.

However, the framework recognizes that information might not have all of the improving qualities yet may still be beneficial. The framework also acknowledges that a widespread barrier to our ability to fulfill the objective of financial reporting is the expense of disclosing financial information.

In setting standards we will strive to require information that has both of the fundamental characteristics and as many of the enhancing characteristics as possible while minimising the cost of producing it.

The framework defines relevance as information that is capable of making a difference in users’ decisions. This quality enables financial information to be useful. To be relevant, information must be timely and predictable. Timeliness requires that information must be available to decision makers before it loses its capacity to influence their decisions. To be predictable, information must not be unexpectedly different from what was expected.

The concept of materiality also affects relevance; information is material if omitting or misstating it could influence decisions that users make on the basis of the financial statements. Financial information is said to have predictive value if it can be used by users to make informed decisions about future events. Decision usefulness is a concept that encompasses predictive value as well as the other aspects of relevance.

Reliability implies trustworthiness and represents whether information is complete and free from error, whether it faithfully represents what it purports to represent, and whether it can be relied on by users in making economic decisions. To be useful, information must be free from material error and bias.

For financial reporting purposes, we require that information have substance over form and verifiability. Substance over form means that recognition and measurement principles will not be subordinated to achieving a desired result. In other words, the form in which an item is presented (e.g., as an operating or nonoperating expense) will not be given priority if it results in information that is misleading. Verifiability means that different observers measuring the same phenomenon under identical conditions would obtain similar results.

The term understandability refers to the quality of information that makes it comprehensible to users. This characteristic requires that accounting standards provide disclosures that enable users to perceive the significance of the reported numbers and other information.

In addition, the framework states that when information is not capable of being understood, users will either develop their own understanding (which may be incorrect) or simply choose to ignore the information. Understandability is enhanced when relevant financial information is presented in a clear and concise manner and when disclosures are provided that explain significant amounts, transactions, and events.

Information that is relevant, confirmatory, or both may make a difference to investors’ decisions, lenders’, and other creditors’ decisions. Financial data has predictive value if it can be used as an input into procedures for predicting future results. It has corroborating value if it returns information on past expectations.

There are two types of qualitative characteristics: fundamental and enhancing. Fundamental characteristics are essential for Decision usefulness, while Enhancing characteristics make the information more useful.

The four fundamental qualitative characteristics are: understandability, relevance, reliability and comparability.

– Understandability is the degree to which users can comprehend the information in the financial statements.

– Relevance is the ability of the information to make a difference in a user’s decision.

– Reliability is the degree of freedom from material error and bias.

– Comparability is the ability to compare financial statements across time and entities.

The three enhancing qualitative characteristics are: consistency, timeliness and verifiability.


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