Qualitative characteristics of financial statements

There are mainly five types of financial statements: statement of financial position, income statement, statement of changes in equity, statement of cash flows, and disclosure notes. The former four mainly show relevant financial data to a business, but the last one mostly includes non-financial data that helps the users of statements understand the numbers depicted in the financial data.

The main purpose of financial statements is to educate shareholders about the financial status and performance of their company. This is because the shareholders are the real owners of the company, but the company is governed and administered by directors. As directors act as stewards of shareholders, it is their duty to prepare financial statements that are free from material misstatements and possess some qualitative characteristics important to enhance their quality and relevance. Following are the main qualitative characteristics of financial statements:

Contents:

• Understandability
• Relevancy
• Reliability
• Comparability
• Timeliness

Understandability:

The financial statements are published to address shareholders of the company. It is therefore important that these statements be prepared in a way that is easy to understand and interpret. The information provided in these statements must be clear and legible. For the sake of understandability, the management must consider not only the statutory data and information but also the voluntary information disclosures, which would make financial statements easier to understand. The directors must elaborate on the information provided in the statements where necessary.

Relevancy:

The information provided in the financial statements must be relevant to the needs of its users. Although the main statutory recipients of these statements are shareholders, there are many other stakeholders that rely on these statements in their decision-making process. These stakeholders generally include fund-provider institutions, potential investors, suppliers, etc. So the information provided in these financial statements must be relevant to the information needs of all these stakeholders.

Reliability:

The information provided in the financial statements must be true and reliable. The data obtained to draw up these financial statements must come from reliable and trustworthy sources. The financial statements must depict a true and fair picture of the status of the company’s affairs. This means that the information provided must not have any significant errors or material misstatements. The transactions recorded in journals and ledger accounts must be based on the concepts of prudence and represent the true nature of the company’s operations. Any areas that are judgmental and subjective in nature must be presented with due care and keen competence.

Comparability:

The financial statements must be prepared in such a way that they are comparable with prior years’ financial statements. This characteristic of financial statements is very important to maintain, as it makes sure that the performance of the company can be monitored and compared. Compareability is achieved by adopting a set of accounting policies and standards that are consistent from period to period and between different jurisdictions. This enables the users of the financial statements to identify and plot trends and patterns in the data, making their decision-making easier.

Timeliness:

All the information in the financial statements must be provided within the relevant span of time. The disclosures must not be delayed so that, while making their economic decisions, the users of these statements possess all the relevant and up-to-date knowledge. Although this characteristic may require more resources, it is still vital, as delayed information makes any corrective actions irrelevant.