Qualitative Characteristics of Accounting Information (See related pages)

LO6 To satisfy the stated objectives, information should possess certain characteristics. The purpose of SFAC 2 is to outline the desired qualitative characteristics of accounting information. Graphic 1-7 indicates these qualitative characteristics, presented in the form of a hierarchy of their perceived importance. Notice that the main focus, as stated in the first concept statement is on decision usefulnessthe ability to be useful in decision making. Understandability means that users must understand the information within the context of the decision being made. This is a userspecific quality because users will differ in their ability to comprehend any set of information. The first stated financial reporting objective of SFAC 1 is to provide comprehensible information to those who have a reasonable understanding of business and economic activities and are willing to study the information. GRAPHIC 1-7 Hierarchy of Desirable Characteristics of Accounting Information

To be useful, information must make a difference in the decision process.

PRIMARY QUALITATIVE CHARACTERISTICS

The primary decision-specific qualities that make accounting information useful are relevance and reliability. Both are critical. No matter how reliable, if information is not relevant to the decision at hand, it is useless. Conversely, relevant information is of little value if it cannot be relied on. Lets look closer at each of these two characteristics, including the components that make those qualities desirable. We also consider two secondary qualitiescomparability and consistency. To be useful for decision making, accounting information should be relevant and reliable. Relevance. To make a difference in the decision process, information must possess predictive value and/or feedback value. Generally, useful information will possess both qualities. For example, if net income and its components confirm investor expectations about future cash-generating ability, then

Practical Boundaries (Constraints) to Achieving Desired Qualitative Characteristics

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Most of us learn early in life that we cant get everything we desire. The latest electronic gadget may have all the qualitative characteristics that current technology can provide, but limited resources may lead us to purchase a fully functional model with fewer bells and whistles. Cost effectiveness also constrains the accounting choices we make. Specifically, its important that the benefits of endowing accounting information with all the qualitative characteristics weve discussed exceed the costs of doing so. A related constraint on the type of information we provide is the concept of materiality. For an additional $20 you can add the latest enhancement to that electronic gadget youre considering. However, despite the higher specs, if you feel it will provide no discernible improvement in the performance of the product as you will use it, why pay the extra $20? In an accounting context, if a more costly way of providing information is not expected to have a material effect on decisions made by those using the information, the less costly method may be acceptable. Cost effectiveness and materiality impart practical constraints on each of the qualitative characteristics of accounting information. Both suggest that a certain accounting treatment might be different from that dictated solely by consideration of desired qualities of information.

COST EFFECTIVENESS
The costs of providing accounting information include those of gathering, processing, and disseminating information. There also are costs to users when interpreting information. In addition, costs include possible adverse economic consequences of implementing accounting standards. These costs in particular are difficult, if not impossible, to quantify. The costs of providing accounting information include any possible adverse economic consequences of accounting standards. An example of this is the standard that requires companies operating in more than one operating segment to disclose certain disaggregated financial information.30 In addition to information gathering, processing, and dissemination costs, many companies feel that this reporting requirement imposes what could be called competitive disadvantage costs. These companies do not want their competitors to have the disaggregated data. The perceived benefit from this or any accounting standard is increased decision usefulness of the information provided, which, hopefully, improves the resource allocation process. It is inherently impossible to quantify this benefit. The elaborate information-gathering process undertaken by the FASB in setting accounting standards is an attempt to assess both costs and benefits of a proposed accounting standard, even if in a subjective, nonquantifiable manner. In the case of reporting disaggregated information, the FASB decided that the perceived benefits of disclosing this information exceeded the costs of providing it. Information is cost effective only if the perceived benefit

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