CFAS Chapter 3 qualitative characteristic

• Faithful representation

  -means that financial reports represent economic phenomena or transactions in words and numbers.
• Faithful representation

  -the descriptions and figures must match what really existed or happened.
• Faithful representation

  -means that the actual effects of the transactions shall be properly accounted for and reported in the financial statements.
• Ingredients of faithful representation:

  Completeness

  Neutrality

  Free from error
• Completeness

  -requires that relevant information should be presented in a way that facilitates understanding and avoids erroneous implication.
• Completeness

  -includes all information necessary for a user to understand the phenomenon or transaction being depicted, including all necessary description and explanation.
• Actually, to be complete, the financial statements shall be accompanied by notes to financial statements
• Notes to financial statements

  -provide the necessary disclosures required by Philippine Financial Reporting Standards.
• Completeness

  -is the result of the standard of adequate disclosure or principle of full disclosure.
• Adequate disclosure

  -means that all significant and relevant information leading to the preparation of financial statements shall be clearly reported.
• Adequate disclosure

  -best described by disclosure of any financial facts significant enough to influence the judgment of informed users.
• Neutrality

  -depiction is without bias in the preparation or presentation of financial information.
• Neutrality

  -depiction is not slanted, weighted, emphasized, de-emphasized or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably by users.
• Neutrality

  -the information contained in the financial statements must be free from bias.
• Neutrality

  -The financial information should not favor one party to the detriment of another party.
• Neutrality

  -The information is directed to the common needs of many users and not to the particular needs of specific users.
• Neutrality

  -synonymous with the all-encompassing principle of fairness.
• To be neutral is to be fair.
• Qualitative characteristics

  -attributes that make financial accounting information useful to the users.
• In deciding which information to include in financial statements, the objective is to ensure that the information is useful to the users in making economic decisions.
• Classification of qualitative characteristics :

  Fundamental qualitative characteristics

  Enhancing qualitative characteristics
• Fundamental qualitative characteristics

  -relate to the content or substance of financial information.
• Fundamental qualitative characteristics:

  Relevance

  Faithful representation
• Information must be both relevant and faithfully represented if it is to be useful.
• Relevance

  -capacity of the information to influence a decision.
• Relevance

  -the financial information must be capable of making a difference in the decisions made by users.
• Relevance

  -requires that the financial information should be related or pertinent to the economic decision.
• Information that does not bear on an economic decision is useless.
• To be useful, information must be relevant to the decision making needs of users.
• Ingredients of relevance:

  Predictive

  Confirmatory
• Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcome
• financial information has predictive value when it can help users increase the likelihood of correctly or accurately

  forecasting outcome of events.
• Financial information has confirmatory value if it provides

  feedback about previous evaluations
• financial information has confirmatory value when it enables users confirm or correct earlier expectations.
• The predictive and confirmatory roles of information are interrelated.
• Materiality

  -practical rule in accounting which dictates that strict adherence to GAAP is not required when the items are not significant enough to affect the evaluation, decision and fairness of the financial statements.
• The materiality concept is also known as the doctorine of convenience
• Materiality is really a quantitative threshold linked very closely to the qualitative characteristic of relevance.
• The relevance of information is affected by its nature and materiality.
• materiality is a subquality of relevance based on the nature or magnitude or both of the items to which the information relates.