CHAPTER 2: [RESERVED FOR THE CHAPTER ON THE
REPORTING ENTITY]
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CHAPTER 3: QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
Introduction
QC1. The qualitative characteristics of useful financial information
discussed in this chapter identify the types of information that are likely to be
most useful to the existing and potential investors, lenders, and other creditors
for making decisions about the reporting entity on the basis of information in its
financial report (financial information).
QC2. Financial reports provide information about the reporting entity’s
economic resources, claims against the reporting entity, and the effects of
transactions and other events and conditions that change those resources and
claims. (This information is referred to in the Conceptual Framework as
information about the economic phenomena.) Some financial reports also include
explanatory material about management’s expectations and strategies for the
reporting entity and other types of forward-looking information.
QC3. The qualitative characteristics of useful financial information5
Qualitative Characteristics of Useful Financial Information
apply to
financial information provided in financial statements, as well as to financial
information provided in other ways. Cost, which is a pervasive constraint on the
reporting entity’s ability to provide useful financial information, applies similarly.
However, the considerations in applying the qualitative characteristics and the
cost constraint may be different for different types of information. For example,
applying them to forward-looking information may be different from applying them
to information about existing economic resources and claims and to changes in
those resources and claims.
QC4. If financial information is to be useful, it must be relevant and faithfully
represent what it purports to represent. The usefulness of financial information is
enhanced if it is comparable, verifiable, timely, and understandable.
Fundamental Qualitative Characteristics
QC5. The fundamental qualitative characteristics are relevance and faithful
representation.
5
Throughout this Conceptual Framework, the terms qualitative characteristics and
constraint refer to the qualitative characteristics of, and the constraint on, useful financial
information.
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Relevance
QC6. Relevant financial information is capable of making a difference in the
decisions made by users. Information may be capable of making a difference in a
decision even if some users choose not to take advantage of it or already are
aware of it from other sources.
QC7. Financial information is capable of making a difference in decisions if
it has predictive value, confirmatory value, or both.
QC8. Financial information has predictive value if it can be used as an input
to processes employed by users to predict future outcomes. Financial information
need not be a prediction or forecast to have predictive value. Financial
information with predictive value is employed by users in making their own
predictions.
QC9. Financial information has confirmatory value if it provides feedback
(confirms or changes) about previous evaluations.
QC10. The predictive value and confirmatory value of financial information
are interrelated. Information that has predictive value often also has confirmatory
value. For example, revenue information for the current year, which can be used
as the basis for predicting revenues in future years, also can be compared with
revenue predictions for the current year that were made in past years. The
results of those comparisons can help a user to correct and improve the
processes that were used to make those previous predictions.
Materiality
QC11. Information is material if omitting it or misstating it could influence
decisions that users make on the basis of the financial information of a specific
reporting entity. In other words, materiality is an entity-specific aspect of
relevance based on the nature or magnitude or both of the items to which the
information relates in the context of an individual entity’s financial report.
Consequently, the Board cannot specify a uniform quantitative threshold for
materiality or predetermine what could be material in a particular situation.
Faithful Representation
QC12. Financial reports represent economic phenomena in words and
numbers. To be useful, financial information not only must represent relevant
phenomena, but it also must faithfully represent the phenomena that it purports
to represent. To be a perfectly faithful representation, a depiction would have
three characteristics. It would be complete, neutral, and free from error. Of
course, perfection is seldom, if ever, achievable. The Board’s objective is to
maximize those qualities to the extent possible.
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QC13. A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary descriptions
and explanations. For example, a complete depiction of a group of assets would
include, at a minimum, a description of the nature of the assets in the group, a
numerical depiction of all of the assets in the group, and a description of what the
numerical depiction represents (for example, original cost, adjusted cost, or fair
value). For some items, a complete depiction also may entail explanations of
significant facts about the quality and nature of the items, factors and
circumstances that might affect their quality and nature, and the process used to
determine the numerical depiction.
QC14. A neutral depiction is without bias in the selection or presentation of
financial information. A neutral depiction is not slanted, weighted, emphasized,
deemphasized, or otherwise manipulated to increase the probability that financial
information will be received favorably or unfavorably by users. Neutral
information does not mean information with no purpose or no influence on
behavior. On the contrary, relevant financial information is, by definition, capable
of making a difference in users’ decisions.
QC15. Faithful representation does not mean accurate in all respects. Free
from error means there are no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information has
been selected and applied with no errors in the process. In this context, free from
error does not mean perfectly accurate in all respects. For example, an estimate
of an unobservable price or value cannot be determined to be accurate or
inaccurate. However, a representation of that estimate can be faithful if the
amount is described clearly and accurately as being an estimate, the nature and
limitations of the estimating process are explained, and no errors have been
made in selecting and applying an appropriate process for developing the
estimate.
QC16. A faithful representation, by itself, does not necessarily result in useful
information. For example, a reporting entity may receive property, plant, and
equipment through a government grant. Obviously, reporting that an entity
acquired an asset at no cost would faithfully represent its cost, but that
information probably would not be very useful. A slightly more subtle example is
an estimate of the amount by which an asset’s carrying amount should be
adjusted to reflect an impairment in the asset’s value. That estimate can be a
faithful representation if the reporting entity has applied properly an appropriate
process, described properly the estimate, and explained any uncertainties that
significantly affect the estimate. However, if the level of uncertainty in such an
estimate is sufficiently large, that estimate will not be particularly useful. In other
words, the relevance of the asset being faithfully represented is questionable. If
there is no alternative representation that is more faithful, that estimate may
provide the best available information.
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Applying the Fundamental Qualitative Characteristics
QC17. Information must be both relevant and faithfully represented if it is to
be useful. Neither a faithful representation of an irrelevant phenomenon, nor an
unfaithful representation of a relevant phenomenon, helps users make good
decisions.
QC18. The most efficient and effective process for applying the fundamental
qualitative characteristics usually would be as follows (subject to the effects of
enhancing characteristics and the cost constraint, which are not considered in
this example). First, identify an economic phenomenon that has the potential to
be useful to users of the reporting entity’s financial information. Second, identify
the type of information about that phenomenon that would be most relevant if it is
available and can be faithfully represented. Third, determine whether that
information is available and can be faithfully represented. If so, the process of
satisfying the fundamental qualitative characteristics ends at that point. If not, the
process is repeated with the next most relevant type of information.
Enhancing Qualitative Characteristics
QC19. Comparability, verifiability, timeliness, and understandability are
qualitative characteristics that enhance the usefulness of information that is
relevant and faithfully represented. The enhancing qualitative characteristics also
may help determine which of two ways should be used to depict a phenomenon if
both are considered equally relevant and faithfully represented.
Comparability
QC20. Users’ decisions involve choosing between alternatives, for example,
selling or holding an investment, or investing in one reporting entity or another.
Consequently, information about a reporting entity is more useful if it can be
compared with similar information about other entities and with similar
information about the same entity for another period or another date.
QC21. Comparability is the qualitative characteristic that enables users to
identify and understand similarities in, and differences among, items. Unlike th