One of the most significant purposes of General Purpose Financial Reports is providing useful and valuable accounting information, which is an important basis to making appropriate decisions for information users. The quality of accounting information is directly related to information users in decision-making and its consequences. Hence, the four qualitative characteristics, namely Understandability, Relevance, Reliability and Comparability are set out in the conceptual framework to ensure that information users can make the right decisions.
This essay will definitely and intensively evaluate and examine the four qualitative characteristics of accounting information. To start with, understandability demands the accounting information be simple, clear, easy to be understood and in plain English to reflect finical position and result of operation of the business. Loren et al. (2009) also suggests that the accounting information should be understood by broad classes of decision makers. One gigantic class is included investors; lenders, suppliers and other trade creditors, customers and so on (Hoggett et al. 2009, p.
447).Sometimes, the information users were non-professionals and even a small number of people are outsiders, like us students, if the accounting information is very professional and difficult to comprehend, it will increase the risk of investors’ decision-making, even worse, and it will form a phenomenon of internal control that may affect the efficiency and capacity of the whole capital market. Another smaller class is excluded auditors and government agency staff, who audit and examine the financial position and tax condition of the business or makes the accounting information of the business in public fairly and righteously.Next, relevance requires accounting information be relevant with the information users and be useful for them to make decisions, evaluate the past and present situation and forecast the future. Obaidat Ahmad N(2007) described that ‘To be relevant to investors, creditors, and others for investment, credit, and similar decisions, accounting information must be capable of making a difference in a decision’.
Furthermore, according to Eldon S. Hendriksen (1992), relevance includes three related concepts, namely, decision-making relevance, destination relevance, and semantic elevance.These mean that accounting information should relate to the users’ specific economic decision-making, be relevant to the objectives that information users want to achieve, and enable information users to understand the intention of the financial reporting. In addition, reliability is the quality of information that permits the business be based on the actual transaction and events to confirm, estimate, report and reflect each accounting elements and other relevant information free from error (Obaidat, 2007).If the accounting information and financial reporting is unreliable, it not only misleads information users when they make decisions, but also impel them to make a wrong decision and then bring them a huge loss. There are two respects that reliability makes the accounting information and financial reporting to be fair, equitable and objective.
For one thing, accounting information should adhere to the principle of substance over form to reflect the measured economic events in fact.It asks accounting personnel to choose appropriate methods to reduce the deviation of the accounting method and make the accounting information more proper to reflect the real situation of economic events and then make it more reliable. For another thing, the accounting information should be verifiable (Loren et al. 2009). It means that another individual or entity with a similar background should be able to re-report the value of using the same methods to deal with the same event to obtain the same result.
Finally, comparability requires the accounting information should be compared with each other. There are two important aspects to illustrate it. On the one hand, compare aspects of an entity at one time and over time. The entity is asked to adopt the same accounting policy unless some special situation. The comparability quality characteristic can help financial report users comprehend the financial condition, opening result and the trend of cash flow easily, and then compare the information during different period. On the other hand, compare with different entities in the same accounting period.
In order to help analyzing financial condition and other alteration circumstances of different business easily, the comparability principle require different business adopt the same accounting principle about the same or similar transactions in the same accounting period. Today, comparability is becoming one of the most indispensable and advantageous qualitative characteristics of accounting information (Putra, 2009). Although the four qualitative characteristics are the most important link between the accounting objectives and achieving the objectives, there are also some elements restrict them.To begin with, accounting information has dubious quality itself, which affects the understandability. For example, people can get different results with different accounting methods or different standards of determining the value of money. Then, due to the imperfect mechanism and people’s original nature, the information can’t be always reliable.
Because people all want to obtain their own personal profits, some accounting staff may make fictitious financial reporting to gain their own goals, and then the accounting information may be totally different from its original.Furthermore, in virtue of different policies, technologies and scales of diverse companies in the country, and dissimilar accounting principles and environments in the international market, some information can’t be compared precisely. For example, the financial reporting of Nestle in China and that of KreisKaffee in England in 2008 may be difficult to compare. At last, the timeliness and expenses should be also considered. The complexity of the processing of getting accounting information made the information delay some days.
People can’t get the information they wanted at the right time, whereas they can gain only the past information which may not reflect the financial position exactly (Loren et al. 2009). Moreover, the processing of getting the accounting information may not obtain more benefits than costs, and then it will affect the reliability and relevance. In conclusion, despite these restraints existed, the four qualitative characteristics of accounting information play a significant role in the capital market to help information users make appropriate decisions and estimate the past and forecast the future easily and carefully.
