2.1 Qualitative Characteristics of Useful Accounting Information

The overriding objective of financial reporting is to provide useful information.This is a very complex objective which includes many characteristics.To assist in choosing among characteristics，IASB identifies two fundamental qualitative characteristics of useful information：relevance and faithful representation.

2.1.1 Relevance

Relevant financial information is capable of making a difference in the decisions made by users.[1]If some users choose not to take advantage of it or are already aware of it from other sources，the information may still be capable of making a difference in a decision. To be capable of making a difference in decisions，financial information should has predictive value，confirmatory value or both.

1.Predictive Value and Confirmatory Value

Information helps users predict the ultimate outcome of past，present，and future events.That is，it has predictive value. “Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcomes.”[2]For example，a user may use an entity's revenue data in the last three years to predict the revenues in the future.So，financial information need not be a prediction or forecast to have predictive value.

Information also helps users confirm or change prior expectations；it has confirmatory value. “Financial information has confirmatory value if it provides feedback about（confirms or changes）previous evaluations.”[3]

The predictive value of financial information is interrelated with its confirmatory value.Information that has predictive value often also has confirmatory value.For example，revenue information for the current year，which can be used as the basis for predicting revenues in future years，can also be compared with revenue predictions for the current year that were made in past years.The results of those comparisons can help a user to correct and improve the processes that were used to make those previous predictions.

2.Materiality

Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.In other words，materiality concerns an item's impact on a company's overall financial operations.It is an entity-specific aspect of relevance based on the nature or magnitude，or both，of the items to which the information relates in the context of an individual entity's financial report.The point involved here is of relative size and importance.If the amount involved is significant when compared with the other revenues and expenses，assets and liabilities，or net income of the company，sound and acceptable standards should be followed in reporting it.

2.1.2 Faithful Representation

“To be useful，financial information must not only represent relevant phenomena，but also faithfully represent the phenomena that it purports to represent.”[4]Financial reports represent economic phenomena in words and numbers. Faithful representation means that the numbers and descriptions match what really existed or happened.If a company reports sales of $ 12 million when it had sales of $ 9.9 million，then it fails to faithfully represent the proper sales amount.

IASB further stated that：“To be a perfectly faithful representation，a depiction would have three characteristics.It would be complete，neutral and free from error. Of course，perfection is seldom，if ever，achievable.”[5]

1.Complete

An omission can cause information to be false or misleading.A complete depiction includes all information necessary for a user to understand the phenomenon being presented，including all necessary descriptions and explanations.For example，a complete depiction of a group of assets would include，at a minimum，a description of the nature of the assets in the group，a numerical depiction of all of the assets in the group，and a description of what the numerical depiction represents（for example，original cost，adjusted cost or fair value）.For some items，a complete depiction may also entail explanations of significant facts about the quality and nature of the items，factors and circumstances that might affect their quality and nature，and the process used to determine the numerical depiction.

2.Neutral

A neutral depiction means without bias in the selection or presentation of financial information.The information is not designed in a way that intentionally leads the users of that information to make an economic decision that the preparer of the information would like them to make.A neutral depiction is not slanted，weighted，emphasized，de-emphasized or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably by users.

3.Free from Error

Free from error means there are no errors or omissions in the description of the phenomenon，and the process used to produce the reported information has been selected and applied with no errors in the process.[6]In this context，free from error does not mean perfectly accurate in all respects.For example，an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate.However，a representation of that estimate can be faithful if the amount is described clearly and accurately as being an estimate，the nature and limitations of the estimating process are explained，and no errors have been made in selecting and applying an appropriate process for developing the estimate.

2.1.3 Enhancing Qualitative Characteristics

IASB distinguished between the fundamental qualitative characteristics that are the most critical and the enhancing qualitative characteristics that are less critical but still highly desirable.The enhancing qualitative characteristics enhance the usefulness of information that is relevant and faithfully represented.They are comparability，verifiability，timeliness and understandability. The enhancing qualitative characteristics may also help determine which of two ways should be used to depict a phenomenon if both are considered equally relevant and faithfully represented.

1.Comparability

Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. Comparability is the qualitative characteristic that enables users to identify and understand similarities in，and differences among，items.[7]An important implication of comparability is that users be informed of the accounting policies employed in the preparation of the financial statements，any changes in those policies and the effects of such changes.

Although related to comparability，consistency is not the same. Consistency refers to the use of the same methods for the same items，either from period to period within a reporting entity or in a single period across entities.Consistency helps to achieve the goal-comparability.

2.Verifiability

Verifiability means that different knowledgeable and independent observers could reach consensus，although not necessarily complete agreement，that a particular depiction is a faithful representation.Verification can be direct or indirect.Direct verification means verifying an amount or other representation through direct observation，for example，by counting cash.Indirect verification means checking the inputs to a model，formula or other technique and recalculating the outputs using the same methodology.An example is verifying the carrying amount of inventory by checking the inputs（quantities and costs）and recalculating the ending inventory using the same cost flow assumption（for example，using the average cost method）.

3.Timeliness

Timeliness means having information available to decision-makers in time in order to be capable of influencing their decisions.To provide information on a timely basis，it may often be necessary to report before all aspects of a transaction or other events are known.Generally，the older the information is，the less useful it is.However，some information may continue to be timely long after the end of a reporting period because，for example，some users may need to identify and assess trends.

4.Understandability

Understandability means that the information provided in financial statements is readily understandable by users.The ability of users to understand financial information depends on two parts：the users' own capabilities and the way in which the information is displayed.Thus，it is not necessary that financial statements be understandable to“everyone”，but they should be understandable to a broad range of users.Users of financial information are assumed to have a reasonable knowledge of business，economic activities，and accounting，and a willingness to study the information with reasonable diligence.

To be understandable，classifying，characterising and presenting information clearly and concisely is needed.

2.1.4 The Cost Constraint on Useful Financial Reporting

Cost is a pervasive constraint on the information that can be provided by financial reporting.The benefits derived from information should exceed the cost of providing it.The evaluation of benefits and costs is，however，substantially a judgmental process.Furthermore，the costs do not necessarily fall on those users who enjoy the benefits.For these reasons，it is difficult to apply a cost test in any particular case.