QUALI CHARACTERISTICS & CONSTRAINTS

• The Fundamental Qualitative Characteristics of a financial statement are Relevance and Faithful Representation.

  • Relevance (must influence the user's decision)
  • Faithful Representation (all information must be included and no misstatements or errors are made).
• The 4 Enhancing Qualitative Characteristics of Financial Statements are Comparability, Understandability, Verifiability, and Timeliness.
• Intracomparability in financial statements refers to the ability to compare within the company, such as presenting and comparing previous data.
• Intercomparability in financial statements involves comparing documents with other companies in the same field.
• Understandability in financial statements means that the notes to the financial statement are simple and easily understandable, requiring users to be knowledgeable of technical terms and jargons.
• Verifiability in financial statements means that the transactions are supported with documents, or if based on fair value, appraisers estimate the cost as verification.
• Timeliness in financial statements means that information must be reported within due time to preserve its relevance and purpose.
• Accounting Constraints are hindrances or impediments to achieving relevance and reliability of financial statements.
• There are 3 Accounting Constraints:

  1. Balance between Benefit & Cost
  2. Balancing Qualitative Characteristics
  3. True and Fair Presentation
• In Balance between Benefit and Cost, Benefit of the information must exceed the cost of providing it. If it is the otherwise, the information may be excluded.
• In Balancing Qualitative Characteristics, relevance and reliability are affected. Relevant Information are reported on time while reliable information requires ample time. There should be balance between these two.
• In True and Fair Presentation, true presentation requires inclusion of all economic transactions. While, fair presentation suggest that some data may be ommitted (those that don't have relevance in the decision of the users). In order to address tis constraint, the professional judgement of accountants are necessary, considering the materiality of each items and the nature of the transaction.