Module 2 

CHARACTERISTIC OF QUALITY FINANCIAL REPORTING 

Learning Objectives: 

1. Know the qualitative characteristics of financial reporting. 

2. Discuss the different fundamental characteristics of financial information. 3.
Explain the fundamental qualitative characteristics of faithful representation.
4. Explain when is an item material? 
5. Discuss fully what is conservatism or prudence. 

Financial reporting is the provision of financial information about an entity to

external  users that is useful to them in making economic decisions and for assessing
the  effectiveness of the entity’s management. The principal way of providing
information to  external users is through the annual financial statements. However,
financial reporting  encompasses not only financial statements but also other means of
communicating  information that related directly or indirectly to the financial accounting
process. 

QUALITATIVE CHARACTERISTICS OF FINANCIAL REPORTING

Information must be both relevant and faithfully represented if it is to be

useful. 

RELEVANCE 
Relevance is the capacity of the information to influence a decision. To be relevant the 
financial information must be capable of making difference in the decisions made
users.  In other words, relevance requires that the financial information should be
related or  pertinent to the economic decision. Information does not bear on an
economic decision  is useless. To be useful, information must be relevant to the
decision needs of users. 
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INGREDIENTS OF RELEVANCE 

Predictive Value  
If it can be used as an input to processes employed by users to predict future
outcome.  In other words, financial information has predictive value when it can help
users  increase the likelihood of correctly or accurately predicting or forecasting
outcome of  events.  

Confirmatory Value 
If it provides feedback about previous evaluations. In other words, financial
information  has confirmatory value when it enables users confirm or correct earlier
expectations.  

Materiality  
Materiality is a sub-quality of relevance base on the nature or magnitude of
both  the items to which the information relates. There is no strict or uniform rule for 
determining whether an item is material or not. Very often, this is dependent on good 
judgement, professional expertise and common sense. 

FAITHFUL REPRESENTATION  
Faithful representation means that financial reports represent economic phenomenon
or  transactions in words and in numbers. In other words, faithful representation means
that  the actual effects of the transactions shall be properly accounted for and reported
in the  financial statements. 

Ingredients of Faithful Representation  

Completeness 
Completeness requires that relevant information should be presented in a way
that  facilitates understanding and avoids erroneous implications. 

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

Neutrality 
Neutral depiction is “without bias” in the preparation or presentation of financial 
formation. A neutral depiction is not slanted, waited, emphasized or otherwise 
manipulated to increase the probability that financial information will be
received  favorably or unfavorably by users. In other words, to be neutral the
information  contained in the financial statement must be free from “bias”. 

Free Form Error 

Free from errors means there are no errors or omissions in the description of the 
phenomenon or transaction, and the process used to produce the reported
information  has been selected and applied with no errors in the process. 

Conservatism 
There is no discussion of conservatism or prudence in conceptual framework
for  financial accounting. However, discussion of the qualities of financial information
would  not be complete with discussion of conservatism or prudence.  

Expressions of Conservatism or Prudence 

“Anticipate no profit and provide for probable and measurable
laws”  “Don’t count your chicks until the eggs hatch.”  

Activity 1

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

Discussion Questions: 

1. Explain the fundamental characteristics of faithful representation. 2.

What is the meaning of qualitative characteristics of financial information?
3. Discuss the overall objective of financial reporting. 
4. What is conservatism or prudence? 
5. Explain the three ingredients of faithful representation. 
 RUBRIC FOR ACTIVITY 1 
Excellent  Good  Satisfactory  Need  
9-10 points 7-8 points 5-6 points Improvement 
0-4 points

Ideas   Thoroughly   Ideas   Ideas   Little or no  

Explanatio explained   explained somewhat   explanation of  ideas
n
ideas explained

Coherency  Extremely   Coherent   Somewhat   Lacks  

coherent writing coherent coherency

Grammar  Few errors  Some Many Many errors  

errors  errors 
that difficult to 
understand

Self-Assessment 1

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

Multiple Choice 

1. What are the qualitative characteristics of financial information? a.

Qualitative characteristics are the attributes that make the information 
provided in financial statements useful to users. 
b. Qualitative characteristics are broad classes of financial effects of 
transactions and other events. 
c. Qualitative characteristics are non-qualitative aspects of an entity’s financial 
position and performance and changes in financial position. 
d. Qualitative characteristics measure the extent to which an entity has complied 
with all relevant standards and interpretations. 

2. Qualitative characteristics 
a. Are considered either fundamental or enhancing 
b. Contribute to the decision-usefulness of financial reporting information c.
Distinguish better information from inferior information for decision-making 
purposes. 
d. All of the choices are correct. 
 3. The fundamental qualitative characteristics are 
a. Relevance and faithful representation 
b. Relevance, faithful representation and materiality 
c. Relevance and reliability 
d. Faithful representation and materiality 

4. Accounting information is considered relevant when it 

a. Can be depended on to represent the economic conditions and events that it  is
intended to present. 
b. Is capable of making a difference in a decision 
c. Is understandable by a reasonably informed users of accounting
information d. Is verifiable and neutral. 

5. The ingredients of relevant financial information are 

a. Predictive value and confirmatory value 
b. Predictive value, confirmatory value and timeliness  
c. Predictive value, confirmatory value and materiality 
d. Predictive value, confirmatory value, timeliness and materiality 

6. What is the quality of information that gives assurance that it is reasonably free of 
error and bias? 
a. Relevance

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

b. Faithful representation 
c. Verifiability 
d. Neutrality 

7. Which of the following is the best decision of “faithful representation” in relation to 
information in financial statements? 
a. Influence on the economic decisions of users 
b. Inclusion of a degree of caution 
c. Freedom from material error 
d. Comprehensibility to users  

8. The ingredients to faithful representation are 

a. Completeness and neutrality 
b. Completeness and free from error 
c. Completeness, neutrality and free from error 
d. Completeness, neutrality, free form error and conservatism 

9. Which of the following qualitative characteristics of financial information requires 

that information shall not be biased in favor of one group of users to the  detriment
of others? 
a. Relevance 
 b. Free from error 
c. Completeness 
d. Neutrality 

10.In the events of conflict between the economic substance of a transaction and its 
legal form, the economic substances shall prevail. 
a. Form over substance 
b. Substance over form 
c. Relevance 
d. Completeness 

References:

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

Management Advisory Services, Rodelio S. Roque 

Financial Accounting Volume One, First Part (2013), Conrado T. Valix et al. Self-
Assessment 1
URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 
Multiple Choice 

1. What are the qualitative characteristics of financial information? a.

Qualitative characteristics are the attributes that make the information 
provided in financial statements useful to users. 
b. Qualitative characteristics are broad classes of financial effects of 
transactions and other events. 
c. Qualitative characteristics are non-qualitative aspects of an entity’s financial 
position and performance and changes in financial position. 
d. Qualitative characteristics measure the extent to which an entity has complied 
with all relevant standards and interpretations. 

2. Qualitative characteristics 
a. Are considered either fundamental or enhancing 
b. Contribute to the decision-usefulness of financial reporting information c.
Distinguish better information from inferior information for decision-making 
purposes. 
d. All of the choices are correct. 

3. The fundamental qualitative characteristics are 

a. Relevance and faithful representation 
b. Relevance, faithful representation and materiality 
c. Relevance and reliability 
d. Faithful representation and materiality 

4. Accounting information is considered relevant when it 

a. Can be depended on to represent the economic conditions and events that it  is
intended to present. 
b. Is capable of making a difference in a decision 
c. Is understandable by a reasonably informed users of accounting
information d. Is verifiable and neutral. 

5. The ingredients of relevant financial information are 

a. Predictive value and confirmatory value 
b. Predictive value, confirmatory value and timeliness  
c. Predictive value, confirmatory value and materiality 
d. Predictive value, confirmatory value, timeliness and materiality 

6. What is the quality of information that gives assurance that it is reasonably free of 
error and bias? 
a. Relevance

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

 b. Faithful representation 
c. Verifiability 
d. Neutrality 

7. Which of the following is the best decision of “faithful representation” in relation to 
information in financial statements? 
a. Influence on the economic decisions of users 
b. Inclusion of a degree of caution 
c. Freedom from material error 
d. Comprehensibility to users  

8. The ingredients to faithful representation are 

a. Completeness and neutrality 
b. Completeness and free from error 
c. Completeness, neutrality and free from error 
d. Completeness, neutrality, free form error and conservatism 

9. Which of the following qualitative characteristics of financial information requires 

that information shall not be biased in favor of one group of users to the  detriment
of others? 
a. Relevance 
b. Free from error 
c. Completeness 
d. Neutrality 

10.In the events of conflict between the economic substance of a transaction and its 
legal form, the economic substances shall prevail. 
a. Form over substance 
b. Substance over form 
c. Relevance 
d. Completeness 

Key To Correction  

Activity 1 – Multiple Choice 

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1.
A
2.
D
3.
A
4.
B
5.
A
6.
D
7.
C
8.
D
9.
D
10.
B
URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020