This page contains a a summary of Financial Accounting Concept No. 2. Use this information to explain the information found on this diagram.


Statement of Financial Accounting Concepts No. 2
Qualitative Characteristics of Accounting Information

Summary Of Principal Conclusions

The purpose of this Statement is to examine the characteristics that make accounting information useful.  Those who prepare, audit, and use financial reports, as well as the Financial Accounting Standards Board, must often select or evaluate accounting alternatives.  The characteristics or qualities of information discussed in this Statement are the ingredients that make information useful and are the qualities to be sought when accounting choices are made.

All financial reporting is concerned in varying degrees with decision making (though decision makers also use information obtained from other sources).  The need for information on which to base investment, credit, and similar decisions underlies the objectives of financial reporting.  The usefulness of information must be evaluated in relation to the purposes to be served, and the objectives of financial reporting are focused on the use of accounting information in decision making.

The central role assigned to decision making leads straight to the overriding criterion by which all accounting choices must be judged.  The better choice is the one that, subject to considerations of cost, produces from among the available alternatives information that is most useful for decision making.

Even objectives that are oriented more towards stewardship are concerned with decisions.  Stewardship deals with the efficiency, effectiveness, and integrity of the steward.  To say that stewardship reporting is an aspect of accounting's decision making role is simply to say that its purpose is to guide actions that may need to be taken in relation to the steward or in relation to the activity that is being monitored.

 A Hierarchy of Accounting Qualities

The characteristics of information that make it a desirable commodity can be viewed as a hierarchy of qualities, with usefulness for decision making of most importance.  Without usefulness, there would be no benefits from information to set against its costs.

User-Specific Factors

In the last analysis, each decision maker judges what accounting information is useful, and that judgment is influenced by factors such as the decisions to be made, the methods of decision making to be used, the information already possessed or obtainable from other sources, and the decision maker's capacity (alone or with professional help) to process the information.  The optimal information for one user will not be optimal for another.  Consequently, the Board, which must try to cater to many different users while considering the burdens placed on those who have to provide information, constantly treads a fine line between requiring disclosure of too much or too little information.

The hierarchy separates user-specific qualities, for example, understandability, from qualities inherent in information.  Information cannot be useful to decision makers who cannot understand it, even though it may otherwise be relevant to a decision and be reliable.  However, understandability of information is related to the characteristics of the decision maker as well as the characteristics of the information itself and, therefore, understandability cannot be evaluated in overall terms but must be judged in relation to a specific class of decision makers.

Primary Decision-Specific Qualities

Relevance and reliability are the two primary qualities that make accounting information useful for decision making.  Subject to constraints imposed by cost and materiality, increased relevance and increased reliability are the characteristics that make information a more desirable commodity--that is, one useful in making decisions.  If either of those qualities is completely missing, the information will not be useful.  Though, ideally, the choice of an accounting alternative should produce information that is both more reliable and more relevant, it may be necessary to sacrifice some of one quality for a gain in another.

To be relevant, information must be timely and it must have predictive value or feedback value or both.  To be reliable, information must have representational faithfulness and it must be verifiable and neutral.  Comparability, which includes consistency, is a secondary quality that interacts with relevance and reliability to contribute to the usefulness of information.  Two constraints are included in the hierarchy, both primarily quantitative in character.  Information can be useful and yet be too costly to justify providing it.  To be useful and worth providing, the benefits of information should exceed its cost.  All of the qualities of information shown are subject to a materiality threshold, and that is also shown as a constraint.



Comparability and Consistency


Costs and Benefits