The qualitative characteristics of financial information
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Define, understand and apply qualitative
characteristics.
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Fundamental qualitative characteristics:
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Relevance - for user in making economic decision
where information provided by financial statements has predictive value and
confirmatory value or both.
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Faithful representation – to be faithfully
representation financial statements should be complete, neutral (without bias)
and free from error (omissions). Perfection is seldom, if ever, achievable.
o
Enhancing qualitative characteristics:
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Comparability – user identifies similarities and
differences between time/competitors and use information in deciding whether to
invest/divest.
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Verifiability – means that different
knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful
representation. Quantified information need not be a single point estimate to
be verifiable. A range of possible amount and the related probabilities can
also be verified.
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Timeliness – information is available in time to
be capable of influencing decision making. Generally, information is less
useful with the passage of time. However, some information may continue to be
timely for a long time in order to study trends.
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Understandability – information presented
clearly and concisely keeping in mind the financial statement is available to user
who have reasonable knowledge
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Define, understand and apply accounting
concepts:
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Materiality – where omitting or misstating
single or combined information influence decision of users. Materiality is an
entity-specific aspect of relevance based on the nature or magnitude, or both,
of the items to which the information relates in the context of an individual
entity’s financial report.
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Substance over form – Financial information
should represent an economic phenomenon rather than merely representing its
legal form. Representing legal form that differs from the economic substance of
underlying economic phenomenon could not result in faithful representation.
o
Going concern – The financial statements are
normally prepared on the assumption that an entity is a going concern and will
continue in operation for the foreseeable future. Where, the entity discloses its
intention to liquidate or faces difficulty so it cannot perform as a going
concern, financial statements are prepared on break up basis.
o
Accruals -
Cash Vs Accruals
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Fair presentation – Financial statements should
adopt a framework for reporting its financial position (i.e. IAS or national
standards).
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Consistency – implement consistent policies and
estimates. Sufficient disclosures should be provided where there are changes in
accounting policies and estimates so it does not affect the need of users of
financial report.
Reference
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