Critical Assessment of Fundamental and Enhancing Qualitative Characteristics in Financial Reporting

This paper critically examines the fundamental and enhancing qualitative characteristics of financial reporting, exploring their significance in providing high-quality information to stakeholders. It delves into concepts like relevance, faithful representation, timeliness, verifiability, understandability, and comparability, illustrating their application with practical examples. The paper emphasizes how these characteristics contribute to the reliability and usefulness of financial statements for decision-making by investors, creditors, and other stakeholders.

Financial reporting

Table of Contents
1. Critical assessment of each of the concepts / assumptions listed under the Fundamental and
Enhancing Qualitative Characteristics.............................................................................................3
2. Illustration with appropriate examples how the concepts / assumptions may be applied to the
financial statements to provide quality information for the stakeholders........................................5
Reference list...................................................................................................................................7

1. Critical assessment of each of the concepts / assumptions listed under the Fundamental
and Enhancing Qualitative Characteristics
Financial reporting refers to the disclosure and presentation of a company’s financial information
to the public (in case of public trading companies) as well as the management of the company
(Barth, 2018). However, these reports are completely different from management reporting.
Financial reporting involves the presentation of the financial health and position of a company.
There are different purposes or objectives for which financial reporting is done within an
organization. The following are the objectives of financial reporting –
 Providing financial information to the management of an organization in order to plan,
analyze, decide and benchmark its performance
 Providing financial information to the investors, creditors, promoters and debt providers
of an organization in order to allow them to make rational as well as prudent decisions on
investment and selling goods on credit
 Proving information to stockholders regarding the position and solvency of a n
organization
 Providing information related to an organization about its procurement and resource
utilization
The discussion on financial reporting indicates that the basic concept of financial reporting is
acting as a bridge among accounting goals or objectives and the way in which accounting is
done. The financial reporting concept also helps in creating recognition of an organization
among its rivals and stakeholders. It enables the stakeholders of a company to analyze and
measure its performance through the presentation of financial reports.
However, certain basic fundamental qualities are needed to be followed in case of financial
reporting. For example, the basic quality of a financial report is “relevance”. The documents of
financial reporting must show the basic understanding of predictive value as well as
confirmatory value (Strojek-Filus & Szewieczek, 2015). The report must be relevant for its users
so that it can be interpreted for different purposes. On the other hand, financial reporting must
also be having the quality of “faithful representation” (Palmrose & Kinney, 2018). Faithful
representation of financial reporting helps in highlighting the neutrality as well as completeness

of the information provided in the reports along with indicating that the information is free from
financial frauds and errors.
Financial reporting must also consist of enhancing qualitative characteristics. The enhancing
qualitative characteristics of the financial reporting documents include the timeliness,
verifiability, understandability and comparability of financial information present in the reports
(Weygandt et al., 2015). The timeliness refers to the up-to-date and timely accounting
information for quick actions to be taken by financial reporting users (Lara, Osma & Penalva,
2016). The comparability refers to the requirement of a financial report to be compared with the
financial reports presented by other companies. On the other hand, verifiability refers to the
fairness in the business transactions presented in financial reports whereas understandability
refers to the qualitative characteristic of financial reports in order to comprehend the information
presented in the financial reports (Rossi, 2016).

2. Illustration with appropriate examples how the concepts / assumptions may be applied to
the financial statements to provide quality information for the stakeholders.
It is important to apply different assumptions and concepts to financial statements in order to
provide quality information to a company’s stakeholders. For example, the recognition concept,
which states that an item can be recognized in financial statements only if it meets four criteria
subject to cost effectiveness along with materiality, which are measurability, definition,
relevance and reliability (Canibano, 2017). On the other hand, the measurement concepts is
another concepts that be may be applied to financial statements by depending on costing
principles such as historical cost, present value, current cost as well as realizable value (Scott,
2015). The principle of disclosure in accounting that states that the qualitative characteristics of
financial reports will be good only if the relevant information provided about the company’s
operations is presented to its investors and creditors along with notes to each financial statement.
In addition to the above concepts and assumptions, various other assumptions such as monetary
unit assumption, economic entity assumption and time period assumption that might be applied
to financial statements. The economic entity assumption states that a business is a completely
separate entity and it is different from all the other entities present in the market (Albu, Albu &
Alexander, 2014). Similarly, the assumption of monetary unit assumes that the monetary unit
such as dollar with which an organization trades is going to stay stable in the future and will not
be losing purchasing power (Canibano, 2017). On the other hand, the assumption of periodicity
assumes that an organization will be able to present its financial report and show its financial
outcomes only within a specific designated time (Bebbington & Larrinaga, 2014).
The two most common concepts that can also be applied to financial statement presentation are
the going concern concept and the accrual concept. The going concern concept of accounting
assumes that any entity operating in the present is going to be operating in the future as well. On
the other hand, the accrual basis of accounting states that any expenses incurred by an entity are
matched to its relevant revenue and is mentioned in financial statements on the period in which it
has been incurred rather than the period in which the cash payment has been made for the
expense. All the assumptions and concepts of accounting mentioned above can be used by an
organization for financial reporting. For example, XYZ Ltd. has made an expense of $2000 for

purchasing inventories on credit while $4000 is incurred for purchasing inventories with cash
payment. For these two transactions, the following will be the journal entries of the company,
which are going to be presented in the financial statements prepared by the company.
Inventories A/C … Dr 6000
To Cash A/C 2000
To Creditor A/C 4000
The above transactions will be transferred to the income statement and balance sheet of the
company in which the $4000 will be considered as cost of sales and consecutively entered under
the creditors heading in the balance sheet.

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