What are the fundamental qualitative characteristics of financial statements?
SFAC No. 2 outlines the are two primary qualitative characteristics and their components. You are expected to understand the fundamental qualitative characteristics and the enhancing characteristics. Both characteristics should be present in order for financial information to be useful to readers. The two fundamental characteristics to remember come exam day are relevance and faithful representation.
Relevance: Key Components
Financial information is relevant and influences financial statement readers decision making process. Financial information is considered relevant if it has predictive value, confirmatory value, and materiality.
1) Predictive value – Financial information that has predictive value can be applied to predict future information.
2) Confirmatory value – Financial information that has confirmatory value can be applied to provide information that confirms or changes previous determinations.
3) Materiality – Financial information is considered material such that if absent or omitted, it would cause a potential influence on existing or potential decisions.
Faithful Representation: Key Components
Financial information is faithfully represented if it is considered reliable to financial statement readers and alleviates doubt in their decision-making process. Financial information is considered faithfully represented if it has completeness, neutrality, and has a freedom from error.
1) Completeness – Financial statements are considered complete if it allows the user to have all information that is pertinent and necessary to coming to an appreciate decision.
2) Neutrality – Financial statements are considered neutral if they are reported without bias in the selection or the presentation of the financial information.
3) Freedom from error – Financial information is considered to be free from error when no omissions or errors have been applied when selecting reporting processes.
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