Qualitative characteristics are:
- materiality and aggregation.
- Faithful presentation.
- Substance over form.
- Full disclosure.
- Balance between benefit and costs.
- Balance between qualitative characteristic.
- True and fair.
1. MATERIALITY AND AGGREGATION
There are two implications:
- Small amount of items may be aggregated.
- Violation of IAS may be permitted for insignificant amounts.
That is, if the item does not make a difference, lAS need not have to be followed.
Assume that an entity purchases low cost assets such as calculators. The proper accounting treatment is to capitalize and depreciate over their useful lives, they are usually expensed out.
Information is relevant to decision if it makes a difference to the decision maker in his ability to produce events or to confirm or correct expectations.
Information is relevant if it provides information about past events or future events and is timely. Disclosure requirements such as segment reporting and interim reporting is relevant because it provides information about past events and it improves the predictability of future events.
Timeliness alone will not make information relevant, but information must be timely to be relevant. It must be valuable before it is too late to influence the decision maker.
Financial statements are numeric translation of business dealings and other events. For information to be reliable the characteristics are required:
- Information should be verifiable.
- Information shout be neutral.
- Representational faithfulness.
4. FAITHFUL REPRESENTATION
Representational faithfulness means that the users can depend on it to represent that which it intends to represent.
5. SUBSTANCE OVER FORM
Transactions and events should be recorded in accordance with their substance and economic reality rather than merely on the basis of legal form.
Neutrality means that accounting information should be communicated without attempting to influence the behavior in a particular direction.
Neutrality implies that information should not favor certain interested groups.
When in doubt, the accountant should choose the alternative that will be least likely to overstate income and assets.
There should be no unrecorded assets, liabilities, revenues and expenses.
To be useful the accounting information should be COMPARABLE. The characteristics of comparability allows the users of accounting information to assess the similarities and differences either among different entities for the same time period or for the same entity over different time periods.
The characteristics of CONSISTENCY also contributes to information usefulness. Consistency is an interpreted comparison
which requires the use of the same accounting policy from one period to another period. Although a change in the accounting policy to a more preferred method results in inconsistency, the change is acceptable if the effect of change is disclosed. Consistency does not ensure comparability. If the measurements used are not representational faithful, comparability will not be achieved.
Consistency has two aspects:
- Consistency of presentation that is, uniform pattern from year to year.
- Consistency in application of accounting policies.
11. FULL DISCLOSURE
Circumstances and events that make a difference to financial statements users should be disclosed.
Companies should make efforts to enable users to understand their financial statements. Understandability is dependent upon . users abilities and a reasonable knowledge of business and accounting is assumed.
Assets and liabilities should not be offset unless this is allowed by an IAS likewise, income and expense items should not be offset unless allowed by an IAS.
Verifiability means that several independent measures will obtain the same accounting measure. Cash is highly verifiable. Inventories and fixed assets are less reliable because alternative valuation methods exist.
Information looses its value for planning and decision making if it is reported too late after the event.
16. BALANCE BETWEEN BENEFIT AND COSTS
The cost of providing financial information should not exceed related benefits unless there is a statutory requirement to disclose the information.
17. BALANCE BETWEEN QUALITATIVE CHARACTERISTICS
Where attainment of one characteristics affects another characteristics a balance has to be struck. For example timelines may affect reliability and the accountant has to use professional judgment for STRIKING a balance between the two characteristics.
18. TRUE AND FAIR
Financial statements should be prepared ill accordance with IFRS.