Research On Qualitative Characteristics Of Financial Reporting Information

This Article focuses on the Qualitative Characteristics of Decision-Useful Financial Reporting Information. Among those important components of Conceptual Framework, qualitative characteristics maybe the core one which connect the concept of financial reporting and other concepts, such as elements of financial statements and measurement, recognition, etc.As described in the Proposal of FASB, published on October 21, 2002, certain aspects of the conceptual framework are incomplete, internally inconsistent, and lack clarity, for example: SFAC No.2: Qualitative Characteristics of Accounting Information, does not provide conceptual guidance necessary for making trade-offs in accounting standards focusing on, among other things, the primary characteristics of relevance and reliability and the qualities of comparability and consistency. So in the Joint Project of FASB and IASB, there is an important phase which involves consideration of objectives of financial reporting and the qualitative characteristics of financial information, which includes relevance, reliability(faithful representation), understandability, and comparability, and trade-offs between qualitative characteristics and how they relate to the concepts of materiality and cost-benefit relations. In this article, we discuss some of the cross-cutting issues, such as: How do we trade off characteristics, for examples, if highly relevant information is difficult to verify? Is the meaning of reliability clear? Should we separate representational faithfulness from verifiability? Does conservatism (prudence, abuse avoidance) conflict with neutrality? Is comparability as important as relevance and reliability?In our opinion, the qualities of decision-useful financial reporting information are relevance, faithful representation, comparability, understandability and transparency. The qualities are subject to two pervasive constraints: materiality and benefits that justify costs. To be useful in making investment, credit, and similar resource allocation decisions, information must be relevant to those decisions and that information must be reliable. Relevant information is capable of making a difference in the decisions of users by helping them to evaluate the potential effects of past, present, or future transactions or other events on future cash flows (predictive value) or to confirm or correct their previous evaluations (confirmatory value). Timeliness—making information availableto decision makers before it loses its capacity to influence decisions—is another aspect of relevance. To be reliable, information must be a faithful representation of the real-world economic phenomena that it purports to represent. The phenomena represented in financial reports are economic resources and obligations and the transactions and other events and circumstances that change them. To be a faithful representation of those economic phenomena, information must be verifiable and neutral. Information cannot influence a particular user's decision unless it is presented in a manner that the user can understand. So understandability is another important qualitative characteristic. The essence of investment, credit, and similar resource allocation decisions is choosing between alternatives, such as whether to buy shares in Entity A or in Entity B. Thus, information about an entity gains greatly in usefulness if it can be compared with similar information about other entities and with similar information about the same entity for some other period or some other point in time. Comparability is not a quality of an individual item of information, but rather a quality of the relationship between two or more items of information. We also include complete, full disclosure and substance over form among the components of transparency. Each qualitative characteristic discussed in this article makes its own distinct contribution to the decision usefulness of financial reporting information. In addition to the qualitative characteristics of relevance, reliability, comparability, understandability and transparency, decision-useful financial reporting is subject to two pervasive constraints: materiality and benefits that justify costs. The two constraints are linked because each concerns why some information is included in financial reports and other information, or the same type of information in different circumstances, is not.