Study Accountancy

Information is considered to be understandable if the significance of the information can be perceived by the expected user of that information. This can be aided by consideration of the user’s abilities and experience and through the aggregation and classification of detailed information into more useful summaries. It is reasonable to expect the user to have some general knowledge of business and economic activities and a willingness to study with reasonable diligence the informtion provided.

Information is comparable if it enables users to discern and evaluate similarities in and differences between the nature and effect of transactions and other events over time and between different business organisations. This is achieved through adherence to the consistency of financial disclosure required by law and also by the consistent application of the organisation’s own accounting policies.

Reliable information must be necessity be a complete and faithful representation of fact:

• Free from material error.
• Faithful representation of the substance of transactions.
• Neutral and free from systematic bias.
• Complete.
• Reported in such a way as to prudently (i.e. cautiously) take account of future uncertainty.

Information is relevant if it has the ability to influence a user’s economic decisions:

• Predictive value: Using analysis of past performance to predict future outcome.
• Confirmatory value: Checking past predictions.
• Choice of aspect: Contains all the information required to make an economic decision - not just one or two relevant items.

Materiality is a threshold quality of useful information, rather than being a primary qualitative characteristic which information must have if it is to be useful. Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. For example, a large company may consider amounts below £1m immatierial (i.e. not material) whereas the owner of a small retail outlet may set a much lower materiality threshold, e.g. £100.