Qualitative Characteristics of Decision-Useful Financial Reporting Information part 1

2: Qualitative Characteristics of Decision-Useful Financial Reporting Information part 1

INTRODUCTION

QC1. The objective of financial reporting is to provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions (paragraph OB2). To achieve that objective, financial reporting should provide information to help those users in assessing the amounts, timing, and uncertainty of an entity’s future cash flows (paragraph OB3). Because the qualitative characteristics discussed in this chapter distinguish more useful information from less useful information, they are the qualities to be sought in making decisions about financial reporting.

QC2. The qualitative characteristics of decision-useful financial reporting information, together with two constraints on providing that information, are discussed in paragraphs QC7–QC59, following a discussion of standard setters’ expectations of users and preparers of that information.

USERS AND PREPARERS OF FINANCIAL INFORMATION

QC3. Financial reporting information is directed to meeting the needs of a wide range of users, with present and potential investors and creditors being the primary users. Those users, especially investors, may have widely differing degrees of knowledge about the business and economic environment, business activities, securities markets, and related matters.

QC4. In developing financial reporting standards, standard setters presume that those who use the resulting information will have a reasonable knowledge of business and economic activities and be able to read a financial report. Standard setters also presume that users of financial reporting information will review and analyze the information with reasonable diligence. Financial reporting is a means of communicating information and, like most other types of information, cannot be of much direct help to those who are unable or unwilling to use it or who misuse it. One does not need to be a cartographer to use a map to get to an unfamiliar location. But it is necessary to know how to read a map, including understanding the concepts and symbols used in preparing it, and one must study the map carefully to get to the desired location. Likewise, one does not need to be an accountant or a professional investor to use financial reporting information, but it is necessary to learn how to read a financial report. And users need to study the information with the degree of care consistent with both the underlying transactions and other events and the related financial reporting to make a well-informed investment or credit decision. (Paragraphs QC39–QC41 discuss the qualitative characteristic of understandability.)

QC5. Standard setters also presume that preparers of financial reports will exercise due care in implementing a financial reporting requirement. Exercising due care includes

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comprehending the reporting requirements for a transaction or other event and applying them properly, as well as presenting the resulting information clearly and concisely.

QC6. Standard setters, of course, also bear responsibilities to exercise due care in developing financial reporting standards, including communicating requirements in a manner that preparers can be expected to comprehend and implement without undue effort. However, the qualitative characteristics (and the framework as a whole) pertain to the information that results from the process of establishing standards and implementing them—not to the characteristics of the standards themselves.