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What are Qualitative Characteristics?
Qualitative characteristics that pertain to accounting or financial information represent the conceptual framework of data. Four common characteristics include relevance, reliability, understandable, and comparable. Each one allows a company to prepare financial information that is consistent to national standards. Companies can also provide the information pertinent for making decisions to extend business operations. Qualitative characteristics may also be a requirement for information released to the general public.
Relevance in terms of qualitative characteristics means that a company’s information is useful and timely. Each prepared report must have a specific time period attached to it. This ensures that an owner or manager can make decisions based on all inputs and/or outputs from a specified time period. When gathering information for decision making, owners and managers may request a specific time period for their information. This will strengthen the relevance of related data.
Financial information must have stated reliability. Reliability indicates all prepared information has no bias or opinion included. For example, accountants may not be willing to report significantly negative information to upper executives. The accountant has a duty, however, to provide information with the reliability that all data is truthful and accurately reports a company’s performance. Information released to the general public must have a high degree of reliability in order to avoid misleading investors.
Financial information must be understandable. Qualitative characteristics usually lead to companies preparing common statements, such as the balance sheet, income statement, and the statement of cash flows. These statements are universal; therefore, they are typically easy to understand by all stakeholders. Internal reports must also have the same degree of understandability. Accountants or financial managers need to take the same approach to preparing understandable reports for internal review.
Comparability means that companies can review and compare their financial information to other companies. Qualitative characteristics also dictate that comparable financial information allows for internal comparison. Owners and managers can review the current period against previous periods to conduct a trend analysis. This allows for discovering increases and decreases in specific areas of the firm.
There is a necessary balance in qualitative characteristics. For example, relevance demands that information be timely. Accountants may not have the necessary time to prepare information, however. The purpose then becomes providing reliable information in the amount of time provided. In these terms, reliability is more important than timeliness. Accountants must also ensure they meet the standards that require neutral reporting mixed with prudent calculations.
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Discussion Comments
@Mammmood - No, I do not, personally. It’s like you said, accountants everywhere want to play fair (most of the time) whether they are doing work for private or public companies. That’s just accounting 101.
Accountants follow the FASB (Financial Accounting Standards Board) which governs their conduct and practice. The standards are the same whether the company is private or public.
If it’s private, it just means that not everyone in the whole world gets to see the company’s statements of accounting.
@Charred - While you point out the occasional breaches of accounting practices, I think it should be pointed out that these things are rare, especially for publicly traded corporations that are under the ever watchful eye of the SEC.
No accountant wants to get implicated in fraud. It’s like a lawyer getting stripped of his law license – they won’t be able to practice again.
The question I have is do you consider the reporting of publicly held firms to be more accurate than that of privately held firms?
@everetra - I think you can reduce all four of these qualitative characteristics of financial accounting into one of the most important objectives of financial reporting in my opinion: to prepare an accurate statement of the company’s financial health so that executives can make sound decisions going forward.
That’s all it amounts to. If you’re doing anything to mislead investors or other management, then they will not be making the best financial decisions. Even when the financial reporting is sound, it can be difficult to make the best decisions in every circumstance.
However, it’s made much more difficult when some accountants engage in “smoke and mirrors” accounting methods.
I second the motion on the importance of reliability in finance reporting.
I used to work for a Fortune 500 company that was in a scandal because some of its accountants and the CEO were caught cooking the books.
I forgot the details of what they actually did, but suffice it to say the financial statements made it look like the company was doing better than it actually did.
I think in some respects the company was hiding its losses to improve its overall picture of financial health. Thus stock prices went up – until the whole thing was exposed, then the stocks tanked and company filed for bankruptcy. The CEO is now serving time in jail for his misdeeds.
The moral of the story is that crime never pays; no amount of money is worth jail time in my opinion, and these kinds of things cannot remain hidden forever.
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