The Conceptual Framework Flashcards
Qualitative Characteristics (11 cards)
What are the two general sub-categories of the qualitative chracteristics?
Fundamental characteristics and enhancing charactaeristics
What are the Fundamental characteristics?
Relevance and Faithful representation
What are the enhancing characteristics?
Comparability, Verifiability, timeliness and Understandability
What is relevance?
Makes it useful for decision-making by helping users predict future outcomes (predictive value) or assess past decisions (confirmatory value). Information is considered relevant if it can influence users’ decisions, which is often determined by its materiality—meaning the information is significant enough that its omission or misstatement could affect those decisions.
What is faithful representation?
Information must be complete, (including all necessary details and explanations), neutral (free from bias), and free from error, allowing users to rely on it for informed decisions
What is Comparatability?
Consistency over time and across entities. ie. no material change in the way sales are recognised in the financial statements
What is Verifiability?
Independent verification must be possible. financial information must be able to be confirmed by different knowledgeable and independent parties as a faithful representation of the underlying economic event. It helps ensure accuracy and builds trust in the information presented.
What is timeliness?
information must be made available to users early enough to help them make decisions
What is Understandability?
Clear and concise for informed users.
Can a firm’s financial statements fulfil enhancing characteristics without fulfilling the fundamental characteristics?
NO! A firm must fulfil the fundamental characteristics before it can fulfil the enhancing characteristics
What is the going concern? (Not one of the qualitative characteristics)
Going concern assumption = assumes the entity will continue operating in the foreseeable future. If the entity no longer qualifies as a going concern, financial reporting needs adjustment.
