Qualitative characteristics are meant to make financial information more advantageous to users. From an analytical point of view, qualitative characteristics can be differentiated into two groups: Fundamental and Enhancing qualitative characteristics. If a company does not have enough information, even managers may not know the real financial situation of their company, which may hinder or even prevent the operation of market disciplines. The use of qualitative characteristics and good accounting standards most often results in financial statements that provide reliable and true information (H. Greunding, M. Koen 2001, s. 3).
Fundamental Qualitative Characteristics
The key qualitative characteristics are (H. Greunding, M. Koen 2001, s. 3):
Relevance - "Information is relevant to a decision-making situation if it has the capacity to help a decision-maker to form, confirm or revise expectations about the future, or to confirm or correct prior expectations about past events." (D. Solomons 1997, s. 43). Relevant information has a great impact on users' economic decisions. Omission or distortion of relevant information may affect the economic decisions of users on which the company's future depends. The nature and relevance of the information affect its relevance.
Reliability - Reliable information is free from material error and bias. The information must not be misleading. It is guided by:
- Substance over form,
- Faithful representation,
- Prudence (H. Greunding, M. Koen 2001, s. 5-6).
There are often discussions where the term 'reliable' is considered synonymous with 'verifiable'. However, it is possible that all verifiers use faulty measuring instruments or faulty rules of measurement. In this situation, the information may be verified and still be incorrect. These words should not be used interchangeably (D. Solomons 1997, s.44).
Comparability - Comparability enables users to identify similarities in and differences between two sets of economic phenomena (F. Beest, G. Braam, S. Boelens 2009, s. 14). If the information can be compared with the financial information presented for other accounting periods, users can identify trends in results and financial position. Information must be presented in a consistent manner between the entities. This will enable users to make important comparisons (H. Greunding, M. Koen 2001, s. 5-6).
Understandability - Information must be easily understood by users of financial statements. People with knowledge of business, economics and accounting should be able to easily understand them. If necessary, footnotes should be used to help understand more complex information s (H. Greunding, M. Koen 2001, s. 5-6). The most important aspects that help in understanding information are: good classification, characterization and clear presentation (P. Scott 2019, s. 11).
- Beest F., Braam G., Boelens S. (2009), Quality of Financial Reporting: measuring qualitative characteristics, "NiCE Working Paper", nr 09-108, s. 14-15
- Greuning H., Koen M. (2001), International Accounring Standards A Practical Guide, The World Bank, s. 3-5
- Operationalising the Qualitative Characteristics of Financial Reporting (2016), "International Journal of Finance and Accounting", nr 5(4): 184-192
- Scott P. (2019), Introduction To Management Accounting, Oxford University Press, s. 10-13
- Solomons D. (1997), Guidelines for Financial Reporting Standards, Garland Publishing, Inc., New York & London, s. 43
Author: Agnieszka Damian