Qualities of useful Financial Information

The four principal qualities of useful financial information are understandability, relevance, reliability and comparability.

Understandability: an essential quality of the information provided in the financial statements is that it is readily understandable by users. For these reason users are assumed to have a reasonable knowledge of business and economic activities and
accounting.
Relevance: information has the quality of being relevant when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations. The relevance of information is affected by its nature
and materiality.
Reliability: information is useful when it is free from material error and bias and can be depended upon by users to represent faithfully that which it purports to represent or could reasonably be expected to represent. To be reliable then the information should:

  • Be represented faithfully,
  • Be accounted for and presented in accordance with their substance and economic reality and not merely their legal form,
  • Be neutral i.e. free from bias,
  • Include some degree of caution especially where uncertainties surround some events and transactions (prudence),
  • Be complete i.e. must be within the bounds of materiality and cost. An omission can cause information to be false.

Comparability: users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different accounting policies,
changes in the various policies and the effect of these changes in the accounts. Compliance with accounting standards also helps achieve this comparability.

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