Qualitative characteristic of useful financial information

Financial information needs relevance and faithful representation. Relevance means it can make a difference to a decision. Faithful representation means it describes what it claims to describe completely, neutrally, and free from error, without promising that estimates will predict outcomes exactly.

These are the fundamental qualities. Four enhancing qualities help readers use information that satisfies them:

• Comparability helps readers identify similarities and differences.
• Verifiability allows knowledgeable, independent observers to reach reasonable agreement that the information faithfully represents what it describes.
• Timeliness makes information available while it can still affect decisions.
• Understandability uses clear classification, labels, and explanations.

Materiality concerns the importance of information in the particular company's circumstances. Cost is a constraint: reporting benefits should justify the costs of providing and using the information.

Apply each quality to the actual problem

Suppose a manufacturer has evidence that a new defect will increase warranty claims. The mistaken idea is that keeping the old estimate makes consecutive years comparable because the method is consistent. The correction is to consider the new evidence when estimating the obligation. Consistent methods do not require unchanged assumptions when the facts change.

A different proposal is to wait until every warranty claim is paid before reporting the obligation. That would remove some uncertainty but could make the report too late to inform decisions. Use an appropriate estimate and explain its uncertainty under the applicable requirements.

The qualities are not numerical scores to add together. Explain which feature of a proposal helps or harms the information. The conceptual framework does not give management permission to ignore an applicable accounting rule.