Why comparability is one of the qualitative characteristics of financial information?

Qualitative characteristics are the attributes that make financial  information  useful to users.  The qualitative characteristics of financial information can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information.

Fundamental Qualitative Characteristics  of Financial Information

1. Relevance

Relevant financial reporting information means the ability of users (shareholder) to make a difference in their decision. Information regarding to economic phenomenon will help the users make a difference decision if it included predictive value and confirmatory value.

1. Predictive Value: Information has predictive value if the value can be useful to the shareholder in predicting certain things that is related to future. Information which is highly predictable does not necessary has predictive value. For instance, depreciation of plant and equipment by using straight line method can be highly predictable every year, but it cannot assist in evaluating the net cash flows.
2. Confirmatory value: Information has confirmatory value if it confirms the validity of prior expectation or correcting them according to the prior evaluations. The outcomes will be same as past expected if the information has confirmed past expectation while the outcome can be changed if correcting in past expectations occurred.

2. Faithful Representation

Useful financial information needs not only be a relevant but also be a faithful representation. Financial reporting information included the characteristics of complete, neutral, and free from material error is supposed to be faithful representation of an economic phenomenon. A single description in financial reports may correspond to multiple economic phenomena. For instance, the plant and equipment presents in the balance sheet may stand for all the plant and equipment that owned by entity.

1. Complete: Complete financial reporting information must have all the necessary information which is useful for decision making and should not be missing a material fact or consideration that would cause the financial reporting information misleading.
2. Neutrality: Neutrality in financial reporting information must be free from bias which the information provided does not favor to the particular group over other interested person. In order to have neutral information, information must report in faithful and trustworthiness condition without changing anything that need to be conveyed for the purpose of inducing someone’s behavior.
3. Free from error: A set of financial reporting information is said to be true if the information is free from error. However, due to some constraint and uncertainty in economy phenomena, financial reporting information does not provide absolutely value which is totally free from error. Therefore, a various type of judgments and estimation based on appropriate input are used by the management in assessing the financial reporting.

Relevance is the fundamental qualitative characteristics  of financial information which connected to the economic phenomena and must be considered first before the other qualitative characteristics. Once the relevance is applied to distinguish which economic phenomena should be presented, faithful representation is going to determine which characteristics are best to correspond to the relevant phenomena. Therefore, relevance and faithful representation must work in a line to provide useful financial information to the users.

Enhancing Qualitative Characteristics  of Financial Information

Enhancing qualitative characteristics  of financial information provide additional benefit and usefulness in the financial reporting information. Therefore, the four important characteristics which are comparability, verifiability, timeliness and understandability should be extent widely. However, the enhancing qualitative characteristics will be useless if the financial information is irrelevant or not faithfully represented in fundamental step. The application of the enhancing qualitative characteristics is redundant process that does not follow priority and prescribed order. Sometimes, one or some of the enhancing qualitative characteristics will be given up to maximize the usefulness of another qualitative characteristic. If such situation happened, appropriate information or evidence should be disclosed.

The financial statement should contain information “sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom it is addressed”. According to the sentence, it is means that the financial statement should contain useful and meaningful information which included quantity and quality so that the reader who we make the financial statement to the person knows and understand it. How we achieve the quality information? Actually there are four qualitative characteristics of financial statements. The four characteristics are understandability, relevance, reliability, and comparability.

First, understandability is including taking into consideration users’ abilities, and aggregation and classification of information. Relevance is including having predictive value and confirmatory value. Next, Reliability is including faithful representation, being natural, free form material error, complete, and prudent. Comparability is including consistency and disclosure. All the characteristics are attributes that make the information provided in financial statements are useful to users.

Understandability includes users’ abilities and aggregation and classification. According to the Framework, the information provided by financial statements needs to be readily understandable by users, it also means that users need to be able to perceive its significance. Besides that, those preparing financial statements are entitled to assume that users have a reasonable knowledge of business, economic activities and accounting and a willingness to study with reasonable diligence the information provided. To aid understandability, financial information is aggregated and classified according to standard disclosure formats which are the income statement and statement of financial position.

To provide a list of all the balances would be meaningless to users. For example, the benefit of providing a list of all the credit customer balances at the yearend limited, whereas a total figure for all the trade receivables does provide information that can be of use to users. They can compare the trade receivables in current year to those last year. This will give some indication as to how credit management has changed over time.

Relevance, from Framework information, the relevance is if the information has the ability to influence the economic decisions of users by helping them to evaluate past, present or future events or confirming, or correcting, their past evaluation. Therefore, information should have predictive value or confirmatory value. Information has predictive value if it helps users to evaluate or assess past, present or future events. To have prediction value, information need not be in the form of an explicit forecast. However, the ability to make predictions form financial statements is enhanced by the manner in which the information on the past is presented.

In additional, transaction newly acquired business, or business that are being disposed of, are reanalyzed and separately disclosed from transactions from continuing operations. Therefore, a diligent user can determine changes in the performance and financial position of the entity that resulted from normal activities that are expected to continue into the future. Information has confirmatory value if it helps users to confirm or correct their past evaluations and assessments. Relevant information can be more relevant when it is provided in a timely manner as it is more likely to influence decision-making.

Materiality which included in relevance, it is an underlying accounting concept. The relevance information is affected by its nature and materiality. Materiality provides guidance as to how a transaction or item of information should be classified in financial statement and/or whether it should be disclosed separately rather than being aggregated with other similar items. A common application of materiality concerns weather an item of expenditure is to be regarded as a non-current asset or an expense. Another common application of materiality relates to separate disclosure of certain items in financial managements. Users are unable to assimilate large amounts of detailed information. This necessitates considerable aggregation of data. Materiality provides guidance on what transactions are to be aggregated by virtue of its specifying which items should be disclosed separately.

Reliability is to be useful, information must also be reliable. The information has the quality of reliability when it is free material error; free from deliberate or systematic basic; can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. To be reliable, information should faithfully represent the underlying transaction or event, reflect the substance of the underlying transaction or event, be neutral, be prudent and complete. To be reliable, information provided in financial statements needs to be neutral. In other word, free from bias.

Prudence which included in the reliable is the historically one of the fundamental accounting concepts. The crux of prudence is prepares of accounting information should exercise prudent views when making judgments about uncertain items such as provisions for doubtful debts, asset lives or the number of warranty claims that might occur. It is also highlighted as one of the qualitative characteristics of accounting information. Prudence is deeply embedded in accounting and possibly even in the personality of many accountants. It is one of the main reasons why accountants are often described as conservative, prudent, cautious, and pessimistic and so on.

However, the important point is that these references to not overstating income or assets, and not understanding expenses or liabilities essentially refer to not overstating the profit in the income statement and financial position in the statement of financial position. Completeness, the financial statements must be complete within the bounds of materiality and cost. An omission can cause the financial statements to be false or misleading and thus unreliable and deficient in terms of its relevance.

Next, comparability is that users must be to compare the financial statement of an entity over time and relative to other entities in order to properly assess the entity’s relative financial position, performance and changes in financial position. Therefore, financial statements should include the current year statements, the comprehensive income statement and statement of financial position, presented beside the prior year statements and it is also called as comparatives. To be able to view similarity prepared financial statements over time allows users to make judgments about trends in performance and in changes in financial position and use this information to predict into the future.

Consistency, it is in the application of accounting policies is vital for producing comparable information. Any changes to the accounting policies and the impact of these changes should be disclosed. Disclosure is included in the accounting policies. It is help to achieve comparability. To assist in the making of comparisons despite inconsistencies, users need to able to identify any differences between the accounting policies adopted by an entity to account for some transactions relative to others, accounting adopted from period by an entity and the accounting policies adopted by different entities. Some academics regard disclosure as a fundamental qualitative characteristics of financial statements.

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