Qualitative characteristics of conceptual Framework

My video lectures around qualitative attributes of conceptual framework such as completeness, comparability, consistency and verification are covered in mine financial accounting, intermediate audit and CPA lessons. Or browser via the food selection above.

You are watching: To be useful, information must have which of the following fundamental qualitative characteristics?


The FASB determined the qualitative characteristics of the theoretical framework the accounting; the attributes of accountancy information that distinguish far better (more useful) information from inferior (less useful) details for decision-making purposes. The main qualitative features are relevance and faithful representation. of accounting information that distinguish far better (more useful) info from inferior (less useful) information for decision-making purposes.

Qualitative features are either an essential or enhancing, depending upon how they impact the decision-usefulness the information. Nevertheless of classification, each qualitative properties contributes to the decision-usefulness the financial reporting information. However, providing useful financial information is minimal by a constraint on gaue won reporting—cost should not exceed the benefits of a report practice.

Fundamental Quality—Relevance

Relevance is just one of the two fundamental qualities that make accountancy information useful for decision-making. Relevance and related ingredients of this basic quality are shown below.

To have relevance, accountancy information have to be qualified of making a distinction in a decision. Info with no bearing top top a decision is irrelevant. Financial info is qualified of making a distinction when it has predictive value, confirmatory value, or both.

Relevant information also helps customers confirm or correct prior expectations; that has confirmatory value. Because that example, once UPS concerns its year-end jae won statements, that confirms or changes past (or present) expectations based on previous evaluations. It follows that predictive value and confirmatory value are interrelated. Because that example, information about the present level and also structure that UPS’s assets and also liabilities helps individuals predict its capacity to take advantage of opportunities and also to reaction to adverse situations. The same details helps to check or correct users’ previous predictions about that ability.

Materiality is a company-specific facet of relevance. Information is product if omitting that or misstating it could influence decision that customers make ~ above the basis of the reported financial information. One individual agency determines whether details is material due to the fact that both the nature and/or size of the item(s) to which the details relates need to be taken into consideration in the context of an separation, personal, instance company’s financial report. Info is immaterial, and thus irrelevant, if the would have no affect on a decision-maker. In short, it need to make a difference or a firm need not report it.

Assessing materiality is just one of the more difficult aspects of bookkeeping because that requires analyzing both the relative size and also importance of an item. However, the is daunting to provide firm accuse in judging once a given item is or is no material. Materiality varies both with family member amount and also with relative importance.

Fundamental Quality—Faithful Representation

Faithful representation is the second basic quality the makes accounting information useful for decision-making. Faithful representation and related ingredients of this fundamental quality are displayed below.

Faithful representation means that the numbers and descriptions match what really existed or happened. Faithful depiction is a necessity due to the fact that most users have neither the moment nor the expertise to evaluate the factual contents of the information. For example, if General Motors‘ earnings statement reports sales the $180,300 million once it had sales that $155,399 million, then the statement fails to faithfully represent the appropriate sales amount. To be a faithful representation, info must it is in complete, neutral, and free of product error.


Completeness means the all the info that is crucial for faithful depiction is provided. One omission can cause information to it is in false or misleading and also thus no be valuable to the users of financial reports.


Neutrality means the a firm cannot choose information to donate one collection of interested parties end another. Unbiased info must it is in the overriding consideration. Because that example, in the notes to jae won statements, tobacco suppliers such as R.J. Reynolds should not suppress information around the many lawsuits that have actually been filed due to the fact that of tobacco-related wellness concerns—even though such disclosure is damaging come the company.Neutrality in rule-making has actually come under boosting attack. Part argue that the FASB must not issue pronouncements that reason undesirable financial effects top top an industry or company. We disagree. Accounting rules (and the standard-setting process) need to be totally free from bias, or we will no longer have credible financial statements. Without credible gaue won statements, individuals will no much longer use this information. An analogy demonstrates the point: numerous individuals gambling on boxing matches since such contests room assumed no to it is in fixed. However nobody bets on rings matches. Why? due to the fact that the windy assumes that wrestling matches are rigged. If financial info is biased (rigged), the public will lose confidence and no much longer use it.

Free native Error.

An information item the is free native error will be a more accurate (faithful) depiction of a gaue won item.Enhancing Qualities

Enhancing qualitative features are complementary come the fundamental qualitative characteristics. These features distinguish more-useful info from less-useful information. Boosting characteristics, shown below, room comparability, verifiability, timeliness, and also understandability.


Information the is measured and also reported in a similar manner for various companies is considered comparable. Comparability enables customers to recognize the actual similarities and also differences in financial events in between companies. For example, in history the accounting for pensions in Japan differed from the in the united States. In Japan, companies generally recorded small or no fee to income for these costs. U.S. Providers recorded pension expense as incurred. As a result, that is challenging to compare and also evaluate the financial results of Toyota or Honda to General Motors or Ford. Investors can only make valid evaluations if equivalent information is available.Another form of comparability, consistency, is present when a firm applies the same audit treatment to comparable events, from period to period. V such application, the agency shows regular use of accountancy standards. The idea of consistency does no mean, however, that companies cannot move from one accounting an approach to another. A company can readjust methods, but it must an initial demonstrate the the recently adopted technique is preferable to the old. If approved, the firm must then disclose the nature and also effect that the accounting change, and the justification for it, in the jae won statements for the period in which that made the change. When a adjust in bookkeeping principles occurs, the auditor typically refers to it in an explanatory paragraph of the audit report. This paragraph identifies the nature of the adjust and refers the reader to the keep in mind in the financial statements the discusses the readjust in detail.


Verifiability occurs as soon as independent measurers, using the exact same methods, obtain comparable results. Verifiability occurs in the following situations.

1.Two live independence auditors count PepsiCo‘s inventory and also arrive in ~ the same physical quantity amount because that inventory. Verification of an amount because that an asset therefore can occur by just counting the inventory (referred come as direct verification).2.Two elevation auditors compute PepsiCo’s inventory value at the finish of the year making use of the FIFO method of perform valuation. Confirmation may take place by checking the inputs (quantity and costs) and also recalculating the outputs (ending list value) utilizing the same bookkeeping convention or methodology (referred to as indirect verification).Timeliness.

Timeliness means having information obtainable to decision-makers prior to it loser its volume to affect decisions. Having relevant information obtainable sooner have the right to enhance its capacity to influence decisions. A absence of timeliness, ~ above the other hand, have the right to rob information of that is usefulness. For example, if Dell waited come report the interim results until ripe months ~ the period, the information would be lot less advantageous for decision-making purposes.


Decision-makers vary widely in the species of decision they make, how they make decisions, the info they already possess or can achieve from various other sources, and their capability to process the information. For details to be useful, there must be a connection (linkage) in between these users and the decisions they make. This link, understandability, is the quality of info that lets reasonably informed users check out its significance. Understandability is amplified when details is classified, characterized, and presented plainly and concisely.For example, i think that Google issues a three-months’ report that mirrors interim earnings have decreased significantly. This interim report gives relevant and also faithfully represented details for decision-making purposes. Some users, upon reading the report, decision to offer their shares. Other users, however, carry out not understand the report’s content and also significance. They room surprised once Google declares a smaller sized year-end dividend and also the re-publishing price declines. Thus, although Google presented highly relevant details that was a faithful representation, it was useless come those that did not recognize it.

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Thus, individuals of jae won reports room assumed to have actually a reasonable knowledge of business and also economic activities. In make decisions, users likewise should review and analyze the information with reasonable diligence. Info that is relevant and also faithfully represented should not it is in excluded native financial reports solely since it is too facility or daunting for some customers to understand without assistance.