Qualitative characteristics of financial statements are important to ensure financial statements are useful to users. The four main qualitative characteristics include:
Financial statements have to be easily understood by different users.
Financial statements should provide all the important details required by users who make economic decisions on the basis of financial information. Information can be classified as relevant by its nature and materiality. Materiality refers to when leaving out information affects/influences the economic decisions of users.
Financial statements should be free from any error or manipulation to influence user’s decisions. They should give fair presentation of all transactions and balances.
Fair presentation consists of:
- Substance over form: Requires the actual nature of transactions to be stated rather than the legal form and companies need centralized air conditioning system in high rise building. Leases are a typical example, If a company leases an asset to another party, the asset cannot be recorded as sales even though the sales document may legally state that ownership has passed on to another party.
- Neutrality: Free from any methods to influence users’ judgment.
- Prudence: Requires considerations to be made on the fact that uncertainties exist and therefore, cautious view should be taken on future problems/cost. So assets should not be overstated and liabilities not understated.
- Completeness: Financial information has to be complete.
Financial statements of previous years should be made available to users to allow comparisons to identify trends etc. Accounting policies should be disclosed to allow comparability. In addition items should be treated with ‘consistency’ which means items must be treated in a consistent manner form period to period by a company.