Accounting Standards: How is Accounting Standards Established? In order to maximize the fundamental qualitative characteristics, some degree of comparability should be included in relevant and faithful representation. Neutrality in financial reporting information must be free from bias which the information provided does not favor to the particular group over other interested person. Do you have a 2:1 degree or higher? Therefore, companies must consider the cost-benefit relationship. Such differences from basic theory are rare, but they do exist. Reference this. Besides, cost of omission and error in decision making also need to be included. The application of the enhancing qualitative characteristics is redundant process that does not follow priority and prescribed order. Therefore, a various type of judgments and estimation based on appropriate input are used by the management in assessing the financial reporting. Weighted Average Method of Inventory Accounting Method, LIFO Method: Last in First Out Inventory Accounting Method, FIFO Method: First in First Out Inventory Accounting Method, FIFO, LIFO, and Average Inventory System: Difference and Similarities. Materiality depends on the size and nature of the item judged in the light of the surrounding circumstances. Cost is one of the pervasive constraints in providing useful financial reporting. Cannot be used in conjunction with other promotional codes. Cost-effectiveness. This chapter describes the qualitative characteristics of useful financial information. Relevance is the fundamental qualitative characteristic which connected to the economic phenomena and must be considered first before the other qualitative characteristics. It is hard to determine a consistent quantitative at which a specific information become material. According to this principle, the principle of ‘anticipate no profit but provide for all probable losses’ should be applied. It is not appropriate for an enterprise, to leave its accounting policies unchanged when more relevant and reliable alternatives exist. However, it can limited by two pervasive constraints which is cost and materiality in providing useful financial information. Information has confirmatory value if it confirms the validity of prior expectation or correcting them according to the prior evaluations. A constraint on qualitative characteristics of accounting information is: Timeliness. Financial reporting information included the characteristics of complete, neutral, and free from material error is supposed to be faithful representation of an economic phenomenon. Neutrality. Users may receive better information for the allocation of resources, tax assessment, and rate regulation. Understandability means that the quality of financial information that the users could be able to identify or discover the meaning of the message that trying to be shown. Too often, users assume that information is free. According to this principle, timely information (though less reliable) should be made available to the decision-makers. When excessive provisions for bad and doubtful debts and depreciation are charged, it leads to the creation of secret reserves, and thus, this principle conflicts with the principle of full disclosure. The estimation of probable losses is a subjective judgment and thus, this principle conflicts with the principle of objectivity. Comparability between entities and consistency in the application of methods or procedures over time period will enhance the informational value in relative economic performance. The materiality depends not only upon the amount of item but also upon the size of business, level, and nature of information, level of the person/department who makes the judgment about materiality, e.g.