Qualitative Characteristics And Constraints Of Decision Useful Financial Reporting Information Accounting Essay

This chapter describes the qualitative features of utile fiscal information. The qualitative features can be categorized as cardinal ( relevancy and faithful representation ) or heightening ( comparison, verifiability, seasonableness and comprehensibility ) based on how they influence the utility of fiscal information. However, it can limited by two permeant restraints which is cost and materiality in supplying utile fiscal information.

1. Cardinal qualitative features

I ) Relevance

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Relevant fiscal describing information means the ability of users ( stockholder ) to do a difference in their determination. Information sing to economic phenomenon will assist the users make a difference determination if it included prognostic value and collateral value.

Predictive Value

Information has prognostic value if the value can be utile to the stockholder in foretelling certain things that is related to future. Information which is extremely predictable does non necessary has prognostic value. For case, depreciation of works and equipment by utilizing consecutive line method can be extremely predictable every twelvemonth, but it can non help in measuring the net hard currency flows.

Confirmatory value

Information has confirmatory value if it confirms the cogency of anterior outlook or rectifying them harmonizing to the anterior ratings. The results will be same as past expected if the information has confirmed past outlook while the result can be changed if correcting in past outlooks occurred.

two ) Faithful Representation

Useful fiscal information needs non merely be a relevant but besides be a faithful representation. Financial describing information included the features of complete, impersonal, and free from material mistake is supposed to be faithful representation of an economic phenomenon. A individual description in fiscal studies may match to multiple economic phenomena. For case, the works and equipment nowadayss in the balance sheet may stand for all the works and equipment that owned by entity.


Complete fiscal coverage information must hold all the necessary information which is utile for determination devising and should non be losing a material fact or consideration that would do the fiscal coverage information misleading.


Neutrality in fiscal coverage information must be free from prejudice which the information provided does non prefer to the peculiar group over other interested individual. In order to hold impersonal information, information must describe in faithful and trustworthiness status without altering anything that need to be conveyed for the intent of bring oning person & A ; acirc ; ˆ™s behaviour.

Free from mistake

A set of fiscal coverage information is said to be true if the information is free from mistake. However, due to some restraint and uncertainness in economic system phenomena, fiscal describing information does non supply perfectly value which is wholly free from mistake. Therefore, a assorted type of judgements and appraisal based on appropriate input are used by the direction in measuring the fiscal coverage.

Application of the Fundamental Qualitative Features

Relevance is the cardinal qualitative feature which connected to the economic phenomena and must be considered first before the other qualitative features. Once the relevancy is applied to separate which economic phenomena should be presented, faithful representation is traveling to find which features are best to match to the relevant phenomena. Therefore, relevancy and faithful representation must work in a line to supply utile fiscal information to the users.

2. Enhancing Qualitative Features

Enhancing qualitative features are extra benefit added to the cardinal to heighten the determination utility of fiscal information.

I ) Comparison

Comparison refers to the ability of the users to separate similarities and differences between two economic phenomena. Comparability between entities and consistence in the application of methods or processs over clip period will heighten the informational value in comparative economic public presentation. In order to maximise the cardinal qualitative features, some grade of comparison should be included in relevant and faithful representation.

two ) Verifiability

Verifiability refers to the capable of the users to guarantee that the information dependably represents what it purports to stand for and to guarantee the selected technique of measuring had been used is without prejudice and mistake. The information is verified when the different judges or perceivers who are knowing confirmed and come up with the same consequence. Confirmation can be distinguished as direct or indirect. Direct confirmation can be verified through an sum or other representation while indirect confirmation refer to the sum or other representation which is verified by analyzing the inputs and tell the end products by following same accounting convention.

three ) Seasonableness

Seasonableness means that the information must be received by the users at the right clip before it loses its ability to impact the determination. Information should be provided with sufficient seasonableness to give a clear and meaningful image for the stockholders. Information that is non available when it is needed by the determination shapers will be useless and the information may lose its possible value.

four ) Comprehensibility

Comprehensibility means that the quality of fiscal information that the users could be able to place or detect the significance of the message that seeking to be shown. Users of fiscal statements are assumed to hold sufficient cognition to analyze the information decently. If the information is classified, clearly represent and concise, it will assist to heighten comprehensibility. Sometimes, the information is complicated and difficult to understand, the users may seek an adviser to explicate to them.

Application of the Enhancing Qualitative Features

Enhancing qualitative features provide extra benefit and utility in the fiscal coverage information. Therefore, the four of import features which are comparison, verifiability, seasonableness and comprehensibility should be extent widely. However, the heightening qualitative features will be useless if the fiscal information is irrelevant or non dependably represented in cardinal measure. The application of the heightening qualitative features is excess procedure that does non follow precedence and prescribed order. Sometimes, one or some of the heightening qualitative features will be given up to maximise the utility of another qualitative feature. If such state of affairs happened, appropriate information or grounds should be disclosed.

Constraints on Financial Reporting

I ) Materiality

Materiality can be explained as the degree of an skip or misstatement of fiscal coverage information which could act upon the determination of users. Materiality depends on the size and nature of the point judged in the visible radiation of the surrounding fortunes. It is difficult to find a consistent quantitative at which a particular information become stuff. In order to supply a faithful representation and relevant fiscal information, materiality degree should be set up so as to observe material misstatement to avoid uncomplete, biased, or non free from mistake in fiscal coverage information.

two ) Cost

Cost is one of the permeant restraints in supplying utile fiscal coverage. The benefit of fiscal coverage imposes costs. Normally, direction will be given to utilize more qualitative instead than quantitative when measuring and justify those costs in the benefit of fiscal describing information. However, it is frequently uncomplete and imperfect if utilizing qualitative technique to analysis cost and benefit of fiscal coverage. Cost of bring forthing information such as cost of roll uping, sorting, processing, verifying and circulating should be determined clearly. Besides, cost of skip and mistake in determination devising besides necessitate to be included. Stockholders and single entities use fiscal coverage information to do determination and bask those benefits will take down the cost of capital.

Application of the Constraints on Financial Reporting

Materiality is said to be one of the permeant restraint on fiscal coverage because it attribute to all the qualitative features. For illustration, materiality demand to be measured when find the sufficiency of relevant information and sufficiency of complete, impersonal, and free from mistake to dependably stand for in fiscal coverage. Application of the cost restraint in fiscal coverage included evaluate whether the benefits of describing information will be able to enforce the costs. It is necessary to reflect on whether one or some qualitative features one or some of the heightening qualitative features will be given up to cut down the cost.


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