QT21.1 Accounting: Discussing Qualitative Characteristics Importance

This essay discusses the importance of three fundamental qualitative characteristics of accounting information: comparability, verifiability, and understandability. Comparability enables financial readers to compare differences and similarities between financial reporting entities, enriching a firm's information environment and facilitating benchmarking. Verifiability assures users that financial reports accurately represent transactions, enhancing trust and reliability by confirming information accuracy through outside parties. Understandability ensures that financial information is easily understood by users, achieved through clear classification, concise representation, and avoidance of overly professional jargon, enabling users to make informed decisions based on reliable information. The essay references academic sources to support these points, emphasizing the role of these characteristics in enhancing the utility of financial statements.

Accounting Principle
Name: Tran Thi Thanh Thanh
Class: QT21.1
Write an essay to briefly discuss the importance of any three of the
fundamental qualitative characteristics or enhancing qualities of accounting
information.
The recommended word limit is 300-500 words.
‘Qualitative characteristics are the tributes that make the information provided
in financial statements useful to users.’ (CFI, 2022). The qualitative
characteristics can be categorized as fundamental or enhancing, depending
on how they affect the utility of financial information. Relevance and faithful
representation are the two primary qualitative elements of financial reports. In
addition, enhancing qualitative characteristics are another benefit added to the
fundamental, considered to enhance the decision usefulness of financial
statements. Those are comparability, verifiability, timeliness, and
understandability.
Comparability is the first crucial element in enhancing the qualities of
accounting information. ‘Comparability enables financial readers to have the
ability to compare the differences and similarities with the financial reporting
entity’ (Li and Wang, 2019). Accounting comparability makes it easier for
investors to understand financial reports through comparable peer data.
Therefore, it enriches a firm’s information environment so that users can
identify trends in economic performance. Moreover, by making benchmarking
between companies, comparability guarantees that investors can approach
more relevant peer and overall industry information.
The next essential attribute is verifiability. Birt et al. (2020) defined the
characteristic of verifiability provides assurance that the information faithfully
represents what it purports to be representing. In layman’s terms, verifiability
in accounting means confirmation of the accuracy of the information being
reported based on outside parties’ ability to reach the same conclusion.
Verifiability is a highly desirable one because it helps to assure users that the
financial reports are n accurate and fair representations of the transaction.
Users wouldn't have trusted the financial statements information if it couldn't
be verified by source documents. Financial information should not involve an
estimate, guess, or subjectivity in how they are determined. In some
circumstances, the organization needs to disclose any specific information in
financial statements that is relevant to users such as a pending legal dispute.

In these cases, verifiability plays an important role, it facilitates the users in
their assessment of its reliability.
Last but not least, is understandability. CFI Team (2022) presented
understandability as the degree to which information is easily understood. The
problem with financial statements is they included a professional structure that
is only suitable for accountants. Thus, the purpose to present the users with
the business’ performance weakens, and eventually, they are compelled to
make their planning and decision based on less reliability. This is only solved
when the material is classified, clearly represent, and concise. In general,
understandability in accounting will help to enhance the understandability of
various components for users.
Li, Q. and Wang, L. (2019) ‘Financial statement comparability and corporate tax
avoidance’, China journal of accounting tudies, pp. 448-473. doi:
https://doi.org/10.1080/21697213.2019.1612187
Birt, J. et al. (2020) Accounting: business reporting for decision making. 7th edn.
New Jersey: John Wiley and Sons Australia.
CFI Team (2022) Qualitative Characteristics of Accounting Information. Available
at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/
qualitative-characteristics-of-accounting-information/ (Accessed: 13 October
2022)