Qualitative Characteristics of Accounting Information

Accounting is the process of recording, summarising, and classifying data of financial character and interpreting the results for correct decision making. It is an important process that every company, firm, or individual needs to implement in order to understand the various transactions and flow of money in or out of the system.

What are the Qualitative Characteristics of Accounting Information?

Every person, an investor, lender, entrepreneur, etc., needs to be updated with the financial information about their company or organisation. This makes accounting an extremely important aspect of running a company. To ensure that the accounting information received is accurate and useful for making decisions, there are certain qualitative characteristics that the information should possess. 

These qualitative characteristics are of two types:

• Fundamental characteristics 
• Enhancing characteristics

The fundamental characteristics are a must-have for all accounting information, whereas certain characteristics may help to enrich or enhance the provided information.

Fundamental Qualitative Characteristics

There are two primary fundamental qualitative characteristics of accounting information. They are as follows:

• Relevance

‘Relevance’ basically refers to the usefulness of the provided information for making important financial decisions. Accounting data must have the following characteristics in order to be relevant:

1. Confirmatory value – Confirmatory value means when the information provided offers details about the previous transactions or events.
2. Predictive value – Predictive value means the ability of the information to help us predict future events based on the past.

Accounting data is useful if it can provide useful information about past events and aid in the prediction of future events or help individuals take appropriate action to deal with potential future events. For example, if a particular company ABC experiences a good financial quarter, it is essential for the accountants in the company to present relevant data about these improved results to the creditors. This relevant data may influence the creditor’s decision to increase the credit available to the company.

• Representational faithfulness

The extent to which information accurately reflects a company’s resources, obligatory claims, transactions, and so on is known as representational faithfulness. It is also known as reliability. Consider a pictorial representation of something you see in real life – how closely does the picture match what you see in real life? Accounting data must meet the following criteria in order to be representatively faithful:

1. Complete – No transaction should be left out of financial statements.
2. Neutrality – The degree to which data is devoid of bias. Financial statements contain subjectivity and estimation, so information cannot be truly ‘neutral.’ A company polling 1,000 accountants and taking the average of their responses, on the other hand, would be considered neutral and free of bias.
3. Free of errors – The extent to which information is error-free.

Enhancing Qualitative Characteristics of Accounting Information

There are several characteristics of accounting information that help enrich the quality of the data provided. They are as follows:

• Verifiability

The degree to which information can be reproduced using the same data and assumptions is known as verifiability. If a company owns $1,000 worth of equipment and tells an accountant the purchase price, salvage value, depreciation method, and useful life, the accountant should be able to replicate the same result. If they are unable to do so, the information is deemed unverifiable.

• Timeliness

Timeliness is an ancillary aspect of relevance. In case information is not available when it is needed or only becomes available long after the reported events, then it has no value for future action. It does not have relevance and is of little or no use. Timeliness alone cannot make information relevant, but a lack of timeliness can rob information of relevance. There are obviously different levels of timeliness, and some reports must be completed quickly. A longer delay in reporting information in some other contexts, such as routine annual reports by a business firm, may materially affect the relevance, and thus, the usefulness of the information.

• Understandability

The degree to which information can be comprehended is known as understandability. Corporate annual reports in today’s society are over 100 pages long and contain a great deal of qualitative data. Financial statement information that is easy to understand is highly desired. In an attempt to hide their underperformance, underperforming companies frequently use a lot of jargon and difficult phrasing in their annual reports.

• Comparability

The level of consistency with which accounting standards and policies are applied from one period to the next is referred to as comparability. Users can draw insightful conclusions about the company’s trends and performance over time if the financial statements are comparable, and accounting standards and policies are applied consistently throughout each accounting period. Comparability also refers to the ease with which a company’s financial statements can be compared to those of other businesses. Accounting information’s qualitative characteristics are important because they make it easier for both company management and investors to make well-informed decisions by allowing them to use the financial statements of a company.