Qualitative characteristics – qualities or attributes that make financial accounting

information useful to the users in making economic decisions.

1) 2 Types of Qualitative Characteristics

a) Fundamental Qualitative Characteristics
- Information must be both relevant and faithfully represented for it is to be
useful.
i) Steps to efficiently and effectively apply Fundamental Qualitative
Characteristics
(1) First, Identify an economic phenomenon that has the potential to be useful
(2) Second, Identify the type of information about the phenomenon that would
be most relevant and can be faithfully represented
(3) Third, Determine whether the information is available

ii) Relevance - To be relevant, the financial information must be capable of

making a difference in the decisions made by the users.
(1) Materiality - a subquality relevance based on the nature or magnitude of
the items to which the information relates. An item is material if knowledge
of it could affect or influence the decision of the primary users of the
financial statements despite its absolute size.
(a) Factors of materiality
(i) Materiality depends on the magnitude and nature of the financial
information
(ii) The size of the item in relation to the total of the group to which the
item belongs is considered.
(iii)The nature of the item may be inherently material because by its
very nature it affects economic decision.

(b) New definition of materiality - an information is material if the omission,

misstatement and obscuring of the information could reasonably
affect the decision of primary users.
 (i) Obscuring Information - the presentation of financial information
not readily understood or not clearly expressed.
(ii) Could reasonably be expected to influence – should be limited to
the information that can affect the decision of the primary
users rather than to all users.
1. Primary users - The primary users include the existing and
potential investors lenders and other creditors.

(2) Types of Relevance

(a) Predictive Value - if it can be used as an input to processes employed
by users to predict future outcome.
(b) Confirmatory Value - if it provides feedback about previous evaluations.
It enables users to confirm or correct earlier expectations.

complete, neutral, free from error

iii) Faithful Representation - the actual effects of the transactions shall be
properly accounted for and reported in the financial statements.
(1) Completeness - includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary
descriptions and explanations.
(a) Standard of adequate disclosure - all significant and relevant
information leading to the preparation of financial statements shall be
clearly reported material fact
(b) Notes to financial statements - provide narrative description or
disaggregation of the items presented in the financial statements

(2) Neutrality - The financial information should not favor one party to the
detriment of another party.
(a) Prudence - exercise of care and caution when dealing with the
assets/income not overstated
uncertainties in the measurement process liabilities/expenses not understated
(b) Conservatism - when alternatives exist, the alternative which has the
least effect on equity should be chosen. record any loss, do not record any gain
 (3) Free from Error - there are no errors or omissions the description of the
phenomenon or transaction.
(a) Measurement of uncertainty - occurs when financial amounts cannot
be directly observed and must be estimated.

iv) Additional Reminders:

(1) Substance over form - requires transactions to be recorded based on
their economic substance rather than just their legal form
(2) Relevance over faithful representation - Relevance is prioritized when
timely and useful estimates are needed, even if they are not perfectly
accurate.
(3) Faithful representation over relevance - faithful representation is
prioritized over relevance to ensure accuracy and reliability in
financial reporting.
b) Enhancing Qualitative Characteristics
- is to increase the usefulness of the financial information that has already been
stated to be relevant and faithfully represented.

i) Comparability - the ability to bring together for the purpose of noting points
of likeness and difference.
(1) Within an entity - is the quality of information that allows comparisons
within a single entity(Ex. Company) through time or from one accounting
period to the next. INTRACOMPARABILITY

(2) Between and across entities - is the quality of information that allows
comparisons between two or more entities(Ex. Two or more companies)
engaged in the same industry. INTERCOMPARABILITY
 (3) Difference between within entity and between and across entities - the
difference between the two is the number of comparisons that they are
able to do.

(4) Reminder: for information to be comparable, like things must look alike
and different things must look different. This is because comparability
is not enhanced by making unlike things look alike or making like things
look different

(5) Principle of Consistency - refers to the use of the same method for the
same item, either from period to period within an entity or in a single
period across entities.

(6) Reminder: comparability and consistency is not the same

(a) Consistency is the uniform application of accounting method from
period to period within an entity
(b) Comparability is the uniform application of accounting method
between and across entities in the same industry.

ii) Understandability - requires that the financial information is

comprehensible or intelligible if it is to be the most useful.
(1) Reminder:
(a) understandability is essential because relevant and faithfully
represented information may prove useless if it is not understood
by the users.
(b) “Financial statements cannot realistically be understood by everyone”
the users must have an understanding of such complex economic
activities, the financial accounting process, and the terminologies
found within financial statements. This is because financial reports are
prepared for users who have reasonable knowledge of business,
 economic activities, and who reviews and analyzes this information
diligently.
(c) Users are always assumed to have reasonable knowledge of these
terms and are willing to study the information with reasonable diligence.
(d) Sometimes even well-informed and diligent users may seek the aid
of an adviser to understand the information involved with complex
phenomena or transactions

iii) Verifiability - means that different, knowledgeable and independent

observers could reach consensus or a general agreement, although not
necessarily complete agreement, that a particular depiction is a faithful
representation.
(1) Direct Verification - means verifying an amount or another
representation through direct observation, like counting cash.

(2) Indirect Verification - means checking the inputs to a model, formula,

or other technique and recalculating the inputs using the same
methodology.

(3) Reminder: The financial information is verifiable in the sense that it is

supported by evidence so that an accountant that would look into the
same evidence would arrive at the same economic decision or conclusion,
thus verifiability implies consensus

iv) Timeliness - financial information must be available or communicated early

enough when a decision is to be made. Information is considered to be
timely if it is received on time to make a difference to the decision maker.
v) Reminder:
(a) Relevant and faithfully represented financial information that is
furnished after a decision is made is useless or of no value.
(b) Generally, the older the information, the less useful it becomes
 (c) some information may continue to be timely long after the end of
the reporting period because some users may need to identify and
assess trends
(d) knowledge of the past is considered as sterile or lacking new
ideas or information. What happened in the past would become the
basis of what would happen in the future

The cost constraints in useful financial reporting BENEFITS > COSTS

- Financial reporting incurs costs related to collecting, processing,

verifying, and disseminating data, which are ultimately borne by users.
Additionally, users face costs when analyzing information and seeking
missing details.
- To determine whether the benefits of reporting outweigh these costs,
the Board gathers feedback from stakeholders, including information
providers, users, auditors, and academics, using both quantitative and
qualitative assessments. Rather than focusing on individual entities, the
Board evaluates costs and benefits in the context of financial reporting
as a whole.

Financial Statements and Reporting Entity

1. What is financial statement?

- provide information about economic resources of the reporting entity,
claims against the entity, and changes in those resources and claims,
that meet the definitions of the elements of financial statements

a) Objectives and Scopes: The objective of financial statements is to deliver

financial information regarding a company's assets, liabilities, equity,
income, and expenses. That information is provided in;
 i) In the statement of financial position, by recognizing assets, liabilities, and
equity
ii) In the statement(s) of financial performance, by recognizing income and
expenses
iii) In additional statements and notes, by presenting and disclosing
information regarding:
(1) Recognized assets, liabilities, equity, income, and expenses, including
details about their nature and the associated risks
(2) Unrecognized assets and liabilities, including information about their
nature and the risks they present
(3) Cash flows
(4) Contributions and distributions related to equity holders
(5) The methods, assumptions, and judgments applied in estimating the
presented or disclosed amounts, along with any changes to those
methods, assumptions, and judgments

2. Reporting period
- Financial statements are prepared for a designated time frame (reporting
period)
a) It offers information about:
i) The assets and liabilities, including unrecognized assets and liabilities
ii) as well as equity that were present at the end of the reporting period or
throughout the reporting period
iii) The income and expenses incurred during the reporting period
b) Information regarding potential future transactions and events (forward-
looking information) is included in financial statements if it pertains to the entity’s:
i) existing assets or liabilities
ii) unrecognized assets or liabilities
iii) equity at the end of the reporting period or during the reporting period
iv) income or expenses for that period
v) If it is beneficial for users of financial statements
3. Perspective Adopted in Financial Statements
- Financial statements present information about transactions and events
from the overall perspective of the reporting entity, rather than focusing
on the interests of specific groups such as existing or potential investors,
lenders, or creditors

4. Going Concern Assumptions

- Financial statements are typically prepared with the assumption that the
reporting entity will continue operating as a going concern for the
foreseeable future, meaning there is no intention or need for liquidation or
cessation of trade.
- If this assumption is not valid, the financial statements must be prepared
on a different basis, which will be clearly described.

5. The Reporting Entity

- A reporting entity—which prepares financial statements—can be a single
company, part of a company, or a group of companies. It doesn't have to
be a legally registered entity.
- Reminder: When one company (parent) controls another (subsidiary), their
combined financial statements are called “consolidated financial
statements” PARENT X SUBSIDIARY
- The goal is to present relevant and accurate information. This means:
A. The reporting entity's activities should not be arbitrarily or
incompletely represented
B. The included activities should result in unbiased information
C. The method used to define the reporting entity's boundaries and what
constitutes the entity should be clearly explained.

6. Consolidated and Unconsolidated Financial Statement

● Consolidated financial statements show the combined financial picture

of a parent company and its subsidiaries as a single unit
 o Reminder: Consolidated statements don't break down the
financial details of each individual subsidiary; that information is
found in each subsidiary's separate financial statements

● Unconsolidated financial statements only show the parent company's

finances, excluding its subsidiaries.
o This is useful because claims against the parent company don't
automatically extend to its subsidiaries, and legal distribution
limits for the parent often depend on its own reserves

Elements of Financial Statements

1. General Purpose Financial Statements

A. Statement of Financial Position
B. Statement of Income
C. Statement of Comprehensive Income
D. Statement of Changes in Owner’s Equity
E. Statement of Cash Flows
F. Notes

2. How do financial statements classify and present financial information?

- Financial statements portray the financial effects of transactions and
other events by grouping them into broad classes according to their
economic characteristics.

3. How do elements directly relate to the measurement of financial position and

financial performance?

These elements are directly related to the measurement of financial position:

A. Asset - An asset is an economic resource and the potential economic benefits no
longer need to be expected to flow to the entity
Essential characteristics of an Asset
1.) The asset is a present economic resource
• The owner has something valuable that can be used or exchanged at the
present.

2.) The economic resource is a right that has the potential to produce economic
benefits
Rights

→ Rights that correspond to an obligation of another entity

(a)Right to receive cash

(b)Right to receive goods or services
(c)Right to exchange economic resources with another party on favorable
terms
(d)Right to benefit from an obligation of another party if a specified
uncertain future event occurs

→ Rights that do not correspond to an obligation of another entity

(a)Right over physical objects, such as property, plant equipment or

inventories
(b)Right of intellectual property

→ Rights established by contract or legislation such as owning a debt

instrument or an equity instrument or owning a registered patent

Potential to produce economic benefits

•This potential does not have to be certain or even likely; what matters is that the
right exists in the present.
•The focus is on owning the right itself, rather than guaranteeing future
benefits
•An economic resource could produce economic benefits if an entity is
entitled:
 1. To receive contractual cash flows
2. To exchange economic resources with another party on
favorable terms
3. To produce cash inflows or avoid cash outflows
4. To receive cash by selling the economic resource
5. To extinguish a liability by transferring an economic resource

3.) The economic resource is controlled by the entity as a result of past events
Control of an economic resource
a) An entity controls an asset if it can decide how to use it and benefit from it
while preventing others from doing so.
b) Control is often established through legal rights (e.g., patents, ownership).
c) However, even without legal rights, control can still exist if the entity has
other ways to restrict access to the economic resource.

B. Liability - A liability is the obligation to transfer an economic resource and not

the ultimate outflow of economic benefits.
Essential characteristics of a Liability
1.) The entity has an obligation
Obligation
A duty or responsibility that an entity has no practical ability to avoid
It can either be legal or constructive

→ Legal obligations can be legally enforced as a consequence of a binding

contract or statutory requirement

→ Constructive obligations are for maintaining good business relations

2.) The obligation is to transfer an economic resource

This includes:
(a) Obligations to pay cash
(b) Obligations to deliver goods or noncash resources
 (c) Obligations to provide services at some future time
(d) Obligations to exchange economic resources with another party on
unfavorable terms
(e) Obligations to transfer an economic resource if specified uncertain
future event occurs

3.) The obligation is considered a liability if these conditions are met

→ An entity has already obtained economic benefits

→ An entity must transfer an economic resource

C. Equity - The residual interest in the assets of the entity after deducting all its
liabilities
Equity claims
(1) Claims on the residual interest and do not meet the definition of a
liability.
(2) These claims may arise through contracts, legislation, or other
means and include:
(a) Shares of various types issued by the entity
(b) Certain obligations of the entity to issue another equity claim

These elements are directly related to the measurement of financial performance:

increase ASSETS A. Income - refers to increases in assets or decreases in liabilities that lead
decrease LIABILITIES
increase EQUITY to an increase in equity, excluding contributions from equity holders.
decrease ASSETS B. Expense - refer to decreases in assets or increases in liabilities that lead
increase LIABILITIES
decrease EQUITY to a decrease in equity, excluding distributions to equity holders.