(SFAC No. 2) Qualitative Characteristics of Accounting Information
The accounting level of the conceptual framework is basically divided into two parts. The first part examines the qualities of accounting information to make it meaningful and useful to users. The second part discusses the introduction to the elements of financial reporting.
Qualitative Characteristics of Accounting Information
One of the objectives of conceptual frameworks is to provide reliable information. Data quality is checked to make the data useful to the user. Accounting information should be such that it can play an effective role in decision making. Effective information must have certain qualities. FASB mentioned all the qualities of data in their Statement of Financial Accounting Concepts No. 2 which are shown the table below.
1. Primary Qualities:
i) Relevance: Information that makes a difference in decision making is called contextual information. Accounting information must be relevant. Information that does not influence decision making need not be provided. Information can be called relevant only if it has the following qualities.
a) Predictive Value, b) Feedback Value, and c) Timeliness
a) Predictive Value: Information that provides an idea about the future is assumed to have predictive value. Information that has predictive value is relevant.
b) Feedback Value: The information that can be confirmed or modified about the previous expectations should be considered to have feedback value. Relevant information should have feedback value.
c) Timeliness: If the decision maker does not have the information before making the decision, that information is no longer useful and that information is not relevant. Therefore, any information must be timely to be relevant. The relevant information should be timely.
ii) Reliability: It is important that accounting information is reliable. Decision making is not possible without reliable information.
a) Verifiability: Whether the information is reliable or not depends on the verifiability of the information. Users can draw different conclusions from verifiable information. Hence, the information must be verifiable.
b) Faithfulness: Information should be presented in such a way that no question of credibility is raised. Providing supporting notes, draft working papers, necessary explanations, footnotes along with the financial report increases the credibility of the report. One of the characteristics of reliable information is credibility.
c) Neutrality: Information should be objective and unbiased. The report should not be prepared with favor or disfavor towards anyone or any particular group.
2. Secondary Quality: In addition to the primary qualities, accounting information needs to have some other qualities which are identified as secondary qualities.
i) Comparability: The accounting information should be such, that a comparison can be made between the two institutions and measures taken to improve the weaker institution.
ii) Consistency: Account information must be consistent. Correct results are obtained when the data is adjusted and a variety of techniques and methods can be applied.