Financial Accounting Chapter 2: Qualitative Characteristics

Perspective Adopted in Financial Statements

• Financial statements provide information about transactions and other events from the perspective of the reporting entity as a whole, not from the perspective of any particular group of stakeholders.

Going Concern Assumption

• The entity will continue in operation for the foreseeable future and has neither the intention nor the need to enter liquidation or to cease trading.
• If such an intention or need exists, the financial statements may have to be prepared on a different basis.

Reporting Entity

• A reporting entity is an entity that is required, or chooses, to prepare financial statements.
• A reporting entity can be a single entity, a portion of an entity, or comprise more than one entity.
• A reporting entity is not necessarily a legal entity.

Types of Financial Statements

• Consolidated financial statements provide information about the assets, liabilities, equity, income, and expenses of both the parent and its subsidiaries as a single reporting entity.
• Unconsolidated financial statements provide information about the parent's assets, liabilities, equity, income, and expenses, and not about those of its subsidiaries.
• Combined financial statements are financial statements on which the reporting entity comprises two or more entities that are not all linked by a parent-subsidiary relationship.

Qualitative Characteristics of Useful Financial Information

• Relevance: financial information that is capable of making a difference in the decisions made by users.
• Faithful representation: financial information that accurately reflects economic phenomena.
• Completeness: financial information that includes all necessary information for users to make informed decisions.
• Neutrality: financial information that is free from bias.
• Free from error: financial information that is accurate and reliable.
• Materiality: financial information that could reasonably be expected to influence the decisions of users.
• Verifiability: financial information that can be confirmed by evidence.
• Comparability: financial information that allows users to identify similarities and differences between entities.
• Understandability: financial information that is presented in a clear and concise manner.
• Timeliness: financial information that is provided in a timely manner to allow users to make informed decisions.

Cost Constraint on Useful Financial Reporting

• Cost is a pervasive constraint on the information that can be provided by financial reporting.

Financial Statements and the Reporting Entity

• Financial statements provide information about the economic resources of the reporting entity, claims against the entity, and changes in those resources and claims.
• The objective of financial statements is to provide financial information about the reporting entity's assets, liabilities, equity, income, and expenses that is useful to users of financial statements.

Objective of General Purpose Financial Reporting

• General purpose financial reports do not provide information about general economic conditions and expectations, political events, and industry and company outlooks.
• General purpose financial reports are not designed to show the value of a reporting entity; but they provide information to help existing and potential investors, lenders, and other creditors to estimate the value of the reporting entity.
• Information needs of users include: economic resources and claims, changes in economic resources and claims, financial performance reflected by accrual accounting, financial performance reflected by past cash flows, and changes in economic resources and claims not resulting from financial performance.