Qualitative Characteristics of Financial Information(B6.2)

Qualitative Characteristics of Useful Financial Information:

Fundamental Qualitative Characteristics:
Financial information must meet two fundamental qualitative characteristics: relevance (providing information that influences users' decisions) and faithful representation (accurately reflecting the substance of transactions). These characteristics are essential for ensuring that financial statements serve their purpose effectively.
Enhancing Qualitative Characteristics:
The Conceptual Framework identifies four enhancing qualitative characteristics: timeliness, understandability, verifiability, and comparability. These attributes improve the usefulness of financial information but are subject to the overarching cost-benefit constraint.
Prudence and Neutrality:
Prudence is seen as a form of caution when making judgments under uncertainty, supporting neutrality in faithful representation. It helps counterbalance management’s optimistic bias but does not necessitate asymmetric prudence, where different thresholds apply for recognizing assets and liabilities.
Substance Over Form:
Faithful representation emphasizes the substance of an economic phenomenon over its legal form. If financial statements reflect only the legal form without capturing the underlying economic reality, they fail to achieve faithful representation, as highlighted in Chapter 2 of the Conceptual Framework.
Measurement Uncertainty:
The Conceptual Framework clarifies that faithful representation does not require complete accuracy. Estimates are often necessary and do not diminish usefulness if properly explained. High uncertainty in measurement should be balanced with relevance, and alternative information with less uncertainty should be used when it enhances the overall usefulness of financial reporting.

These points emphasize the importance of balancing conceptual rigor with practical considerations to ensure financial information remains relevant, reliable, and understandable.