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ASB Statement of principles: Chapter Three - The qualitative characteristics of financial information.

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Introduction

ASB Statement of principles: Chapter Three - The qualitative characteristics of financial information. Users who make economic decisions based on financial statements need these financial statements to provide information which is useful to them. To make sure that financial statements provide useful information to users, the ASB's statement of principles chapter three which is titled the qualitative characteristics of financial information sets out the desirable characteristics of financial information. In chapter three the ASB set out five main qualities that are required of financial. The first one is materiality, which is threshold quality, its purpose is to make sure that any information that is given dosen't impair the usefulness of the other information given. The other four qualities relevance, reliability, comparability and understandability. We shall now look at each qualitative characteristics in turn. The first characteristic of information is relevance. The definition of relevance is as follows: Information is relevent if it has the ability to influence the economic decisions of users and is provided in time to influence those decisions. (SP, 3.2) The above definition has its basis in a key feature of the objective of financial reportring, that is information is provided to aid decision-making and is valued for its ability to do so. Relevance isn't defined by whether it actually influences decisions but by the capacity to influence decisions. Relevance is based on two characteristics, unformation to be relevant needs to at least one of the characteristics. ...read more.

Middle

The accountanting ability that can be assumed in users of financial information is a crucial in designing the financial statements. Users of financial statements are likely to have a wide range of abilities,varying from limited skills of amatuers to high skilled investors and financial analysts. A problem arises with the varying abilities of users. The problem is, that financial statements need to provide information that na�ve users can understand but also providing the sophisticated and complex information that skilled investors or financial analysts need. To resolve this problem a policy decision has to be made as a social choice by policymakers rather following the conceptual framework. The Statement of principles choice is descibed in the passage below: 'Those preparing financial statements are entitled to assume that users have a reasonable knowledge of business and economic activities and accounting and a willingness to study with reasonable diligence the information provided.' (SP, 3.27) This does imply that financial statements can assume reasonably sophisticated users. The fifth and final main charateristic of information is materiality. The idea of materiality is one of a threshold quality and any item that is not material does not require to be considered further. The statement of principles the idea of a threshold qulity as: 'An item of information is material to the financial statements if its misstatement or omission might reasonably be expected to influence the economic decisions of users of those financial statements, including their assessment of management's stewardship.' ...read more.

Conclusion

These will continue to have to be dealt with by judgement in individual cases and whetheror not the scheme will be of assistance at this level remains to be seen.'7 Also the Statement of Priciples lists cost benefit as one of the factors that ASB takes into account in setting standards. Applying a cost-benefit analysis is seen to be an important part of the standard-setting process. 'The benefits from improvements in financial information flow through primarily to the users of the information (in terms of better decisions), though there may also be social benefits from improvements in the allocation of resources and in spurring managers to improve performance. The costs of reporting improved financial information include any incremental resources used to generate and audit the new information compared with what was periously reported; any incremental resources used in disseminating the information (...) ; potental damage to the reporting entity's commercialposition because competitors will also obtain the information; and the costs involved in absorbing and analysing the new information.'8 When appyling the qualitative characteristics and the cost-benefit analysis should be kept in mind that different users, even within a single user group, will in theory, seek different trade-offs between the qualitative characteristics and a different balance between costs and benefits. Finally the use of Prudence in the Statement of Principle has been critcised. Some people comment that it does not go far enough in asserting the impotance of providing unbiased information. For others, the traditional approach is preferred: 'Prudence [as defined by SSAP2] is a mainstay of traditional practice. The Prudence concept creates an essential bias . . . a potent antidote to counteract preparers' eternal optimism. ...read more.

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