CFAS 3-6

• Qualitative Characteristics


  Are the qualities or attributes that make financial accounting information useful to the users
• Fundamental Qualitative Characteristics


  Relates to the content or substance of financial information and are relevant and faithful representation
• 1. Identify an economic phenomenon or transaction

  2. Identify the type of information about the phenomenon or transaction that would be most relevant

  3. Determine whether the information is available


  3 Application of qualitative Characteristics
• Relevance


  Is the capacity of the information to influence a decision
• Materiality


  Is a practical rule in accounting which dictates strict adherence to GAAP is not required when the items are not significant enough.

  - Also known as the doctrine of convenience
• Obscuring Information


  The presentation of financial information not readily understood or not clearly expressed. This can be characterized by deliberate vagueness, ambiguity and abstruseness.
• Primary Users


  Includes the existing and potential investors lenders and other creditors
• Other Users


  Includes the employees, customers, government agencies and the public in general
• Size and Nature of the item


  What are the factors of Materiality?
• Faithful Representation


  Means that financial reports represent economic phenomena or transactions in words and numbers
• 1. Completeness

  2. Neutrality

  3. Free from error


  What are the 3 ingredients of faithful representation?
• Completeness


  Relevant information should be presented in a way that facilitates
• Standard of adequate disclosure


  Means that all significant and relevant information leading to the preparation financial statements shall be clearly reported
• Neutrality


  This is without bias in the preparation or presentation of financial information
• Prudence


  The exercise of care and caution when dealing with the uncertainties in the measurement process such that income or assets are not overstated and liabilities or expense are not understated
• Conservatism


  Means that when alternatives exist, the alternative which has the least effects on equity should be chosen
• Contingent loss


  Recognized as a "provision" if the loss is probable and the amount can be reliably measured
• Contingent gain


  Not recorgnized but disclosed only
• Free from error


  Means there are no errors or omissions in the description of the phenomenon it transaction
• Measurement Uncertainty


  Arises when monetary amoy is in financial reports cannot be observed directly and must instead be estimated
• Enhancing Qualitative Characteristics


  Related to the presentation or form of the financial information
• Comparability


  The ability to bring together for the purpose of noting points of likeness and difference
• Consistency


  Refers to the use of the same method for the same item, either from period to period within an entity or in a single period across entities
• Understandability


  Requires that financial information must be comprehensible or intelligible if it is to be most useful
• Verifiability


  Means that different knowledge and independent observers could reach consensus that a particular depiction is a faithful representation
• • Direct Verification

  • Indirect Verification


  2 Types of Verification?
• Direct Verification


  Verifying an amount or other representation through direct observation

  e.g.: Counting Cash
• Indirect Verification


  Means checking the inputs to a model, formula or other technique and recalculating the inputs using the same technology
• Timeliness


  Means that financial information must be available or communicated early enough when a decision is to be made