Monday, 18 February 2013

The qualitative characteristics of financial statements


Why people trust on financial statements?

All of the users of financial statements, both internal and external to the organisation, require the information provided to be useful. In this context, information should:

(a) enable its recipient to make effective decisions;
(b) be adequate for taking effective action to control the organisation or provide valuable
details relating to its environment;
(c) be compatible with the responsibilities and needs of its recipient;
(d) be produced at optimum cost;
(e) be easily understood by its recipient;
(f ) be timely;
(g) be suffi ciently accurate and precise for the purpose of its provision.

The IASB’s Framework also suggests that fi nancial statements should have certain qualitative characteristics, including relevance, reliability, completeness, comparability, under-standability and timeliness. For decisions to be made, the information must be relevant to the decision and be clearly presented, stating any assumptions upon which the information is based, so that the user may exercise judgement as appropriate.

Often, better information may be provided at additional cost or after an additional time delay. The adequacy of information is important, and factors such as the cost of the information and the speed with which it is available may be more important than it being 100 per cent accurate. The information provided must be communicated to the person responsible for taking any action in respect of the information provided. In this regard it is better to distinguish information between that which relates to controllable aspects of the business and that which relates to non-controllable aspects. The controllable aspects may then be further divided into those that are signifi cant and an exception reporting approach applied.

Exception reporting is the technique of reducing the size of management reports by including only those items that should be drawn to the manager’s attention, rather than including all items.
Most organisations will set targets against which actual performance can be compared. You will learn more about the setting of such targets in your studies of management accounting. Their use enables exception reports to be produced to highlight the differences between the actual and target results. The use of exception reporting avoids wasting unnecessary management time reading reports that merely advise the management that no action is required and concentrates on those issues that do require management action. In conclusion, thereore, internal information will be much more detailed than external information, and will be prepared on a more regular basis.

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