What is the most important qualitative characteristic of accounting information?

As we understand that different users require financial information for assistance in their economic decisions. Entities publish financial statements so that users can get their information needs fulfilled.

The dependence of users’ economic decision on financial statements is crucial and if the financial information is not accurate or is not true and fair then users may end up making wrong decisions. Therefore, financial statements need to have certain qualitative characteristics in order to be useful to its users.

IASB Framework for Presentation and Preparation of Financial Statements states FOUR principal characteristics as follows:

1. Understandability
2. Relevance
3. Reliability
4. Comparability

Understandability

Users cannot use such financial information that they cannot understand. Problems in understanding may arise due to user’s inabilities or because of the information itself. Definitely entity cannot do anything about users and its upon the user to have at basic level of understanding about financial statements. Also, users are not required to be professional accountants and that is why where we expect to have complex information then its neither fault on part of user nor from the side of the entity preparing financial statements.

However, entity can present information in such a manner that it helps in understanding. Also with proper explanation financial statements can be made more understandable. Therefore, entity is required to take reasonable measures in order to make financial statements easy to understand. However, it does not mean that complex information which is also of material nature should be excluded from the financial statements on the basis that it is creating problems in overall understandability of financial statements.

Relevance

Information is considered relevant which adds value to the decision making process by providing the required bits and pieces of past, preset and future times. Through relevant information users can evaluate whether they are moving along the right path i.e. making correct decisions.

Information is also said to be relevant when it is capable of confirming or correcting the existing thought process and information.

Many students might think that financial statements always relates to past (financial period that have already passed) then how come past information can help us in making decisions? Well to give you a simple example, we all use our experience to decide about something and certainly experience is always what we already know from the past. Same way, past information given in financial statements help us in predicting the financial position and financial performance of the company in upcoming financial periods. So, even past information can be relevant.

Reliability

Information is reliable when it is dependable and this is possible if it is:

• free from errors, especially material errors
• complete
• free from bias

Information may be relevant but this alone does not suffice for reliability as well. Information must be reliable as well as relevant in order to be useful for decision making. There are many other factors that contribute towards the reliability of the financial information.

Comparability

Comparability of information refers to its ability to stand useful overtime and against the financial information from other sources. Users cannot evaluate different aspects of entity’s financial position and financial performance if they are unable to compare the financial information of one period with another or financial information of one entity with another entity’s financial information.

In order to have comparable information entities prepare there financial statements by following a uniform pattern of presentation which is usually as instructed by the International or Local Accounting Standards and after they adopt a particular style they remain consistent in its application.

However, comparability does not require that one stays uniform even if there are other ways to make financial statements even more reliable and relevant.

By the above discussion we can observe one fact that all four principal characteristics are interrelated and higher level is achieved in one area at the expense of the other. For example, in order to make financial statements more reliable entity may include such financial information which is complex thus higher level of reliability is achieved at the expense of understandability.

It is the responsibility of the management to have an optimum mix of all four important qualitative characteristics of financial statements

The accounting function is essential in every business, but not simply for keeping track of income, expenses and tax payments as many may think. In fact, the primary attribute of accounting information is to provide accurate and relevant financial data to decision makers so that they can act reasonably. Both fundamental and enhancing qualities are important to consider when creating or evaluating a company's financial statements.

Fundamental Qualities of Accounting Information

The fundamental qualities of accounting information are relevance and reliability, also known as representational faithfulness. If accounting data is to be relevant and useful to decision makers if must be timely. Information gathered from the company's past can be used to make predictions about what might happen in the future, but the most recent data must be included and considered as well. If the statements being reviewed are from six months ago, they don't reflect the company's current financial standing and it will be difficult for managers or owners to make wise decisions. Therefore it is especially important for small business owners to remain current and stay on top of recording their day to day transactions so they can accurately assess how well they are doing financially.

Other qualities of a good accounting system include the completeness, neutrality and accuracy of the financial information being evaluated. This is referred to as reliability or representational faithfulness. In general, the accounts should truthfully represent the business's financial picture. Accounts should include all historical data for a company and figures should never be altered or left out in order to reflect a better situation. Accounting errors should be corrected and data within categories should accurately reflect the defined standards for each and not cross into other categories. For example, inventory represents the value of merchandise on hand and available for sale. It should not include the value of machinery used to manufacture those items.

Enhancing Qualities of Accounting 

Other qualitative characteristics of accounting information are referred to as secondary or enhancing qualities. These include consistency, understandability and comparability. Accountants use standardized practices so that information is recorded, calculated and analyzed in ways that are the same from period to period. For example, if expenses were recorded in one period based on a certain set of criteria and then recorded based on a different set of rules or thresholds within the next period, the data would reflect the outcome of the company's finances very differently between the two periods. Consistent accounting practices avoids these types of discrepancies.

One of the objectives of accounting that is closely linked to consistency is comparability. Financial data may be compared not only from one accounting period to the next but also against another company's information. Managers can accurately compare figures from two periods and determine the company's productivity over time only when statements have been produced following consistent adherence to standardized accounting practices. Fluctuation in trends should be identifiable as causes other than random accounting procedures or errors. Additionally, investors rely on the comparability of financial statements from organizations so they can make informed decisions concerning a company's potential. If everyone is following the same standards of accounting principles, then the information they view can fairly and correctly withstand a side by side comparison.

Clear and Understandable Statements

A third enhancing quality of accounting is understandability. Simply put, someone with a reasonable amount of accounting or business knowledge should be able to read and understand your company's financial reports. Statements that include lengthy explanations or data that confuses the bottom line may be evidence of a company's attempt to gloss over poor performance.

While the general purpose of accounting principles is to standardize the practice throughout the business world, accountants and business leaders engage in a debate of how far to implement these qualities. Some feel that the principles should serve only to guide accountants in the practice and allow for individuals to make their own decisions when a question arises. Others believe the qualities should be treated as rules and strictly followed in order to maintain comparability in an increasingly complex business environment.

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