One of the main objectives of financial reporting is to satisfy the information needs of a range of users. Qualitative characteristics of financial statements are attributes that enhance their meaningfulness to such users. However, the accounting framework does not leave compliance with these to anyone's whim and fancy. Financial statements and reports must possess specific characteristics; the four primary attributes are understand-ability, relevance, reliability and comparability.
There are other qualitative characteristics of financial statements, but those four are the most important, especially as they rely on fundamental assumptions like consistency and fair presentation. These characteristics define what makes financial statements useful to the users—particularly investors.
Understand-ability
While financial statements can be somewhat complicated for the uninitiated to understand, users must be able to understand the information within them. This applies to the format/ layout of the statement, the terms used in the statement and the policies, methods and assumptions utilized in preparing the statement.
Users of financial statements are assumed to have sufficient knowledge to study the information properly. Understand-ability ensures that a user equipped with the basic knowledge can discern information pertaining to the performance and financial position of an enterprise.
Relevance
Since financial statements are for users to make economic decisions, the information must be relevant to the decisions that those users have to make. Once all items in a financial statement help users to assess historic or future events, the information in the statement relevant to the users. Whether the information affects the economic decisions of users and the nature of information affect relevance as well. Materiality is one of the assumptions used in financial reporting that contributes to relevance.
Reliability
In the context of accounting, "reliable" information is free from material error (errors that affect the economic decisions of users) and bias. In other words, a reliable financial statement must fairly and consistently present information about the performance and financial position of an entity. Users must have confidence in the financial statement, without it being misleading or deliberately constructed in a manner that presents the entity in a favorable light. The main thrust of the auditing function is to reinforce the reliability of information presented in financial statements.
Comparability
Imagine that you saw a financial statement from one company that was prepared differently from other companies in the industry, or even prepared differently from previous statements. It is likely that the users would not be able to compare the statements among companies and over time. Comparability adds a degree of transparency to financial statements by allowing comparisons over time and among entities.
Comparability is affected by consistency of presentation and disclosure of accounting policies—particularly when comparing items among entities that might use different (but equally valid) methods like straight-line/ reducing balance depreciation or FIFO/ average cost method. This indicates that comparable financial statements are not necessarily uniform, but merely allow suitable comparisons.
Besides understand ability, reliability, relevance and comparability, other qualitative characteristics of information include completeness, prudence, neutrality, faithful representation and substance over form. Sometimes, there exists a trade-off between or among qualitative characteristics. The financial accountant usually exercises discretion where any conflict might occur.
Sources from : 4 Main Qualitative characteristics
