Qualitative Characteristics of Financial Information
Two fundamental, four enhancing
The Conceptual Framework sets two fundamental qualitative characteristics. Relevance means information can make a difference to decisions: it has predictive value, confirmatory value, or both, and it is material - materiality is entity-specific and depends on both amount and nature. Faithful representation means the depiction is complete, neutral and free from material error; it is supported by substance over form and by prudence, the exercise of caution when making judgements under uncertainty.
The four enhancing characteristics are comparability (over time and between entities, aided by consistent policies and disclosure), verifiability (independent observers could reach consensus), timeliness (available in time to influence decisions) and understandability (clear presentation for users with reasonable knowledge). The cost constraint means the benefit of information must justify the cost of producing it.
Traps: (1) Prudence is not deliberate understatement of assets or overstatement of liabilities - that would breach neutrality. (2) Going concern and accruals are underlying assumptions, not qualitative characteristics. (3) Faithful representation requires freedom from material error, not total precision. (4) The fundamentals can conflict - more relevant fair value estimates may be less verifiable.
Worked example: a retailer sells goods on 30-day terms but the buyer may return them within 60 days. Legally the buyer owns the goods, but economically the seller retains the risks. Recording revenue together with a refund liability for expected returns applies substance over form and prudence.
Rule of thumb: if an item is trivial relative to profit and net assets, apply materiality and expense it; if it could change a user's decision, apply the full treatment.