(a) Arises from peripheral or incidental Show
(b) Obligation to transfer resources (c) Increases ownership interest. (d) Declares and pays cash dividends to (e) Increases in net assets in a period (f) Items characterized by service (g) Equals increase in assets less (h) Arises from income statement (i) Residual interest in the assets of the (j) Increases assets during a period (k) Decreases assets during the period by (l) Includes all changes in equity during The fundamental (primary) and enhancing (secondary) qualitative characteristics What are the Qualitative Characteristics of Accounting Information?The demand for accounting information by investors, lenders, creditors, etc., creates fundamental qualitative characteristics that are desirable in accounting information. There are six qualitative characteristics of accounting information. Two of the six qualitative characteristics are fundamental (must have), while the remaining four qualitative characteristics are enhancing (nice to have).  Fundamental (Primary) Qualitative CharacteristicsQualitative characteristics of accounting information that must be present for information to be useful in making decisions:
Enhancing (Secondary) Qualitative CharacteristicsQualitative characteristics of accounting information that impact how useful the information is:
We will look at each qualitative characteristic in more detail below. RelevanceRelevance refers to how helpful the information is for financial decision-making processes. For accounting information to be relevant, it must possess:
Therefore, accounting information is relevant if it can provide helpful information about past events and help in predicting future events or in taking action to deal with possible future events. For example, a company experiencing a strong quarter and presenting these improved results to creditors is relevant to the creditors’ decision-making process to extend or enlarge credit available to the company. Representational FaithfulnessRepresentational faithfulness, also known as reliability, is the extent to which information accurately reflects a company’s resources, obligatory claims, transactions, etc. To help, think of a pictorial depiction of something in real life – how accurately does the picture represent what you see in real life? For accounting information to possess representational faithfulness, it must be:
VerifiabilityVerifiability is the extent to which information is reproducible given the same data and assumptions. For example, if a company owns equipment worth $1,000 and told an accountant the purchase cost, salvage value, depreciation method, and useful life, the accountant should be able to reproduce the same result. If they cannot, the information is considered not verifiable. TimelinessTimeliness is how quickly information is available to users of accounting information. The less timely (thus resulting in older information), the less useful information is for decision-making. Timeliness matters for accounting information because it competes with other information. For example, if a company issues its financial statements a year after its accounting period, users of financial statements would find it difficult to determine how well the company is doing in the present. UnderstandabilityUnderstandability is the degree to which information is easily understood. In today’s society, corporate annual reports are in excess of 100 pages, with significant qualitative information. Information that is understandable to the average user of financial statements is highly desirable. It is common for poorly performing companies to use a lot of jargon and difficult phrasing in its annual report in an attempt to disguise the underperformance. ComparabilityComparability is the degree to which accounting standards and policies are consistently applied from one period to another. Financial statements that are comparable, with consistent accounting standards and policies applied throughout each accounting period, enable users to draw insightful conclusions about the trends and performance of the company over time. In addition, comparability also refers to the ability to easily compare a company’s financial statements with those of other companies. The qualitative characteristics of accounting information are important because they make it easier for both company management and investors to utilize a company’s financial statements to make well-informed decisions. More ResourcesThank you for reading CFI’s guide on Qualitative Characteristics of Accounting Information. To keep learning and advancing your career, the following resources will be helpful:
Is comparability and consistency the same?Comparability refers to the process of comparing two or more companies based on their status. In contrast, Consistency means the equality in procedure and policies of a company, which enables the user to compare the financial statements of a particular accounting period.
What is the distinction between comparability and consistency quizlet?Comparability facilitates comparisons between information about two different enterprises at a particular point in time. Consistency, a type of comparability, facilitates comparisons between information about the same enterprise at two different points in time.
What is comparability in accounting information?Financial Statement Comparability refers to the degree of consistency between financial statements of different companies, which is an important measure of accounting information quality (De Franco, Kothari, & Verdi, 2011. (2011). The benefits of financial statement comparability.
Why do accounting standards require consistency and comparability?The objective of the consistency standard is to ensure that if comparability of financial statements between periods has been materially affected by changes in accounting principles, there will be appropriate reporting by the independent auditor regarding such changes.
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