by D. Victor

Created on: March 02, 2010   Last Updated: November 24, 2010

One of the main objectives of financial reporting is to satisfy the information needs of a range of users. Qualitative characteristics of financial statements are attributes that enhance their meaningfulness to such users. However, the accounting framework does not leave compliance with these to anyone's whim and fancy. Financial statements and reports must possess specific characteristics; the four primary attributes are as follows:

Understandability

Relevance

Reliability

Comparability

There are other qualitative characteristics of financial statements, but those four are the most important, especially as they rely on fundamental assumptions like consistency and fair presentation. These characteristics define what makes financial statements useful to the users—particularly investors.

♦  Understandability

While financial statements can be somewhat complicated for the uninitiated to understand, users must be able to understand the information within them. This applies to the format/ layout of the statement, the terms used in the statement and the policies, methods and assumptions utilized in preparing the statement.

Users of financial statements are assumed to have sufficient knowledge to study the information properly. Understandability ensures that a user equipped with the basic knowledge can discern information pertaining to the performance and financial position of an enterprise.

♦  Relevance

Since financial statements are for users to make economic decisions, the information must be relevant to the decisions that those users have to make.  Once all items in a financial statement help users to assess historic or future events, the information in the statement relevant to the users. Whether the information affects the economic decisions of users (materiality) and the nature of information affect relevance as well. Materiality is one of the assumptions used in financial reporting that contributes to relevance.

♦ Reliability

In the context of accounting, "reliable" information is free from material error (errors that affect the economic decisions of users) and bias. In other words, a reliable financial statement must fairly and consistently present information about the performance and financial position of an entity. Users must have confidence in the financial statement, without it being misleading or deliberately constructed in a manner that presents the entity in a favourable light. The

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