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Qualitative Characteristics of Financial Information - Essay Example

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Qualitative Characteristics of Financial Information Table of Contents Table of Contents 2 Introduction 3 Qualitative Characteristics of Financial Information 3 Materiality 5 Prudence & Neutrality 7 Relevance & Reliability 7 Conclusion 9 References 11 Appendices 13 Introduction This essay aims to present an analysis of the qualitative characteristics of the financial information and the major constraints presented by these characteristics…
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Qualitative Characteristics of Financial Information
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Qualitative Characteristics of Financial Information

The information is not just useful for the capital providers but also to the other user groups such as government, regulatory bodies etc. The next level of conceptual framework is the fundamental concepts i.e. qualitative characteristics of financial information and elements of financial statements. The third level is the implementation level, which contains recognition, disclosure and measurement concepts through principles, assumptions and constraints (Appendix 1). The qualitative characteristics of financial information are an important part of the total conceptual framework because they act as a bridge between the first level and third level of the framework. However, the definition of quality threshold of materiality and the conflicts between prudence and neutrality, and relevance and reliability has always been debated. In addition to the discussion of these constraints, this essay presents the Conceptual Framework for Financial Reporting 2010 provided by IASB as to how the new framework has placed these characteristics. ...
The Conceptual Framework for Financial Reporting 2010 or commonly referred to as Framework 2010 states the objective of financial reporting that is to provide the financial information related to the reporting entity that can be helpful to investors and creditors in making appropriate decisions (McConnell, 2011). Therefore, in order for the financial information to be useful, it must possess some characteristics such as materiality, prudence, neutrality, relevance and reliability. An information is considered material if its misstatement, modification or omission can influence the economic decisions of the users, taken on the basis of that information. Materiality depends on the magnitude of the error in circumstances when the misstatement or omission has taken place. The financial statements are prepared in an uncertain environment due to many events such as useful life of fixed assets, collectability of doubtful receivables, and warranty claims. These uncertainties are recognized by exercising prudence while preparing the financial statements. Prudence means making careful judgement in making estimates in the uncertain conditions, so that the income or assets are not overstated and expenses or liabilities are not understated (IASC Foundation and IASB, 2008, p.25). Neutrality means that the financial information should be free from any bias and does not influence decision making in order to achieve predetermined outcome. Financial information is useful if it has the quality of influencing decisions by helping the users in evaluation of past, future and present events related to the reporting entity. The past information regarding the financial position and performance is frequently used for predicting the future performance and position. Information is ... Read More
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