Session 2: Qualitative Characteristics of Financial Information

Learning Objectives

Enlighten the learners on the main users of financial statements.

• Explaining to the participants on the qualitative characteristics of financial information.

Important Term

• Stakeholders

Qualitative Attributes of Accounting Information

Stake holders are all interested parties in the financial statements of an organization for their economic decisions.

Accounting information will be great importance if it will be grasped by the intended users. Outlined below are some of the qualities which financial information should have if the users are to benefit from it.

• Relevance – Information should contain only the useful information which can influence the decision making of the users. Availability of large data will confuse the users of financial information but will result in high cost to the enterprise. Accountants should posses the skills of being able to analyze and select only that data which will be of beneficial to a particular user.
• Timeliness – Time is of great importance if information is to be useful especially where there is has reporting time span.
• Quantifiability - Accounting information should be able to be quantified. Quantification is usually in monetary terms although quantities other than currency are employed by accountants. This however, does not mean exclusion of non-quantifiable qualitative factors in management decision-making.
• Objectivity - Accounting information should be measured in such a manner that two or more accountants of equal competence should be able to measure the same data and arrive at approximately similar results. Accounting information should be free from bias.
• Understandability - Accounting information should be well simplified in line with the level of knowledge of the desired target audience.

Users and Suppliers of Financial Statements Information
Stakeholders are all interested parties in the financial statements produced by the enterprise. Parties demanding financial statement information include:

• Shareholders, investors and security analysts
• Managers
• Employees
• Lenders and other suppliers
• Customers
• Government regulatory agencies

Shareholders, Investors and Security Analysts

Shareholders, investors and security analysts are major recipients of the financial statements of corporations. These may be individuals or large institutional inventors operating as multi national companies such as Insurance firms and pension fund entities.

These stakeholders may have invested in the enterprise or are about to committee large funds into the entity. They may also have other investment opportunities available to them and are in process of choosing an opportune way of investing their funds. Most of these stakeholders may be making the decision on behalf of other investors like incase of Pension fund entities.

As seen above, the investors have important decision to make and usually the accounting information will be used as the main basing of their decision making. As such information in accounts should be produced accurately but also contain all relevant information which can enable them to make sound and informed decisions.
Information in the accounting records also affects the value of the entity’s share value. Any information relating to the performance of the entity will directly define the share price. Remember the wealth of the shareholders in the business is represented by the share value.

Shareholders having entrusted the Directors with the running of the business want to assess whether or not the business is profitable. This information can be used when deciding whether to extend their stake in the business or assessing a possible take over bid.

Managers

Managers owe the shareholders duty of trust. They are supposed to run the business as agents of the shareholders as such they also take keen interest in the operation the business so as to be able to control the operations of the business.
Most senior managers are rewarded based on the level of profit performance. This gives managers additional incentive to ensure that accounting information is accurate but also that the business is performing well.

Managers need to control the operations of the business and to be able to perform such task they need accounting information. They use the information in their budget preparation, analyzing performance of various products or services but also analyzing the division performance.

Managers are also required to produce final set of accounts which shows a true and fair view and without keeping records of accounting information it is almost impossible to produce these sets of accounts.

Employees

Just like Managers, employees also take keen interest in monitoring the financial performance of their entity as it is the source of their income. An entity which is making persistent losses may found it self out of business and this will cut the livelihood of the employees.

Employees takes pride in working for a profitable and entity of sound financial status as they are assured of continued service of employment but also have a good social status in the community.

Profit levels and other financial information assist the trade unionists in collective bargaining on wage increases. In some organization it is a standing policy that once the entity makes profit it will share with its employees in form of bonus. This also drives the employees to be on the look out for the financial performance.

Lenders and other Credit Suppliers

Both existing and prospective lenders need accounting information, mainly to assess the financial risk of the business. As existing lenders they have invested money in the business and would want to be assured that what ever money the entity owes them would be repaid together with the interest.

Suppliers of various materials would always want to be assured that once they start trading with the entity there will be continuity of trading. One way of monitoring this is through assessment of the going concern of the business which can be done through the analysis of financial information.

Prospective lender would like to assess the past credit records for entity before committing any funds to the entity.

Customers

Accounting information provides the stability of the business and this also assist the trading partners to assess the viability and continued trading with the organization.

Governments and their Agencies

Government is interested in the activities of the enterprise owing to their concern with the allocation of resources and economic policy, with taxation policy and collection and with company regulation. Accounting information is crucial as it directly affect the tax which the government is expected to collect for the business.