International financial reporting Essay Example | Topics and Well Written Essays - 2750 words

International financial reporting - Essay Example Therefore, it is important that users are able to distinguish the financial statements clearly from other related information published in the annual report as IASs or IFRs only apply to the financial statement. 3.0 Qualitative Characteristics The framework states: â€Å"Qualitative characteristics are the attributes that make the information provided in financial statement useful to users†. The statement of principles identifies five principal qualitative characteristics consist of understandability, relevance, reliability, materiality, and comparability elaborated as below. 3.1 Understandability Understandability refers to the way in which information is presented in the financial statements and the capabilities of the users to utilize the financial information. However, assumption is made whereby users are equip with basic business, economic and accounting knowledge and thus be able to interpret the information accurately. All the relevant information is required to be refl ected in the financial statement disregards of its complexity and the fear that misunderstanding would arise due to the complexity of the issue. Additionally, an organized presentation of financial information would enhance the understandability of the users. 3.2 Relevance Information is said to be relevant if it has the ability to influence the economic decisions of the users and is provided in time to influence those decisions. Relevant information assists users in analyzing the past trends, present situation and predicts the future prospect based on the past analysis. Besides that, it allows the users to enhance their knowledge on the firm by confirming or correcting their past evaluations. The ratios calculated based on the financial statement provides an insight on the financial performance of the firm and areas which are of high interest to the owner such as dividend payout, price earnings ratio and earnings per share. Moreover, it can be used to evaluate and predict its futur e outlook and indicate the firm’s investment attractiveness. 3.3 Materiality The relevance of information is affected by its nature and materiality. Information is considered to be material if its omission or misstatement would significantly affect the economic decisions of the users, taken on the basis of financial statement. Items which are substantial in terms of size and nature such as auditor fees and director fees are essential to be disclosed in the financial statement. However, materiality is not a primary qualitative characteristic itself as it is merely a threshold or cut-off point. 3.4 Reliability Information must also be trusty and possess faithful representation. Information is reliable when it is free from material errors and bias and can be depended upon by users to represent the economic conditions that it purports to represent or could reasonably be expected to represent. Besides that, it contains the characteristics of being verifiable and neutral. Informati on which is relevant but unreliable may be misleading and cause disputes or claim for damages in a legal action. 3.4.1 Faithful Presentation Information must represent faithfully the transactions it purports to represent in order to be reliable. There is a risk that this may not be the case, not due to bias, but due to the inherent difficulties in identifying the transactions or deciding on an appropriate method of measurement or