Understanding qualitative aspects help provide information which
- Make sense to the end-user
- Have consistency across financial statements.
Qualitative aspects about financial statements can be divided into the following categories:
Let's understand them one by one,
Understandability
- it's stating the information provided is readily understandable by users who have a reasonable knowledge of the basic operations of the business.
- The information provided is not too complex.
Relevance
- Information is considered relevant when it influences the economic decisions of users by helping them evaluate past, present and future or confirming or correcting past evaluations
- Materiality: Information is material if its omission or misstatement could influence
the decision of end-users.
Reliability
- Unreliable information misleads financial statements presentation and may result in wrong decision inference by end-users.
- Faithful Representation: Financial statement items(such as assets, liabilities etc) should be recognised only if the recognition criteria of each such item is met.
- Substance over form: Substance and economic reality of transaction prevail over legal form.
- Neutrality: Information free from any bias and financial statements do not influence the decision of end-users to achieve predetermined results or outcomes.
- Prudence: Whenever estimates are made, prudence is to be followed i.e they are not excessive or biased.
- Completeness: All transactions relating to the period should be covered in preparing financial statements.
Comparability
- Information should be comparable with past data of the same entity as well as present data of other entities in the same line of business.
- Financial statements should show the corresponding information of the previous periods.
- Any change in accounting policy over periods should be mentioned.
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