What are Framework for Financial Reporting IND AS 1 ?

The characteristics of qualitative useful financial information discussed in this chapter identify the types of information that are likely to be most beneficial to the existing and potential investors, lenders, and other creditors to make decisions about the reporting entity based on information in its financial report (financial report information).

A financial report provides information about the economic resources of the reporting entity, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims. Some financial reports also include materials that explain management’s expectations and strategies for the reporting entity and other types of forward-looking information.

Qualitative beneficial financial information characteristics apply to financial information provided in financial statements, and financial information is provided in other ways. Cost is considered a pervasive constraint on the ability to report entity for providing valuable financial information similarly applied.

However, the considerations behind applying the qualitative characteristics and the cost constraint might also differ for different types of information mention in Accounting standard.

E.g., applying them to forward-looking information may differ from applying them to information about existing economic resources and claims and changes in those resources and claims.

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL Financial Reporting:

If financial information is valid, it must be relevant and represent faithfully what it purports to represent. The usefulness of financial information can be enhanced if it is understandable, comparable, verifiable and timely.

Fundamental qualitative characteristics:

The fundamental qualitative characteristics are considered as relevant and faithful representations.

Relevance in Financial Reporting

Relevant financial information can be capable of making a difference in the decisions made by users. Information may make a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources.

Financial information can make a difference in decisions if it has predictive value, confirmatory value or both.

Financial information has predictive value if used as an input to processes employed by users for predicting future outcomes. It is not necessary that the financial information have to be a prediction or forecast for having predictive value. Users employ financial information with predictive value in making their predictions.

Financial information has a confirmatory value if it provides feedback about previous evaluations like confirms or various changes.

There is an interrelation between predictive value and confirmatory value of financial information. Details that are having predictive values often also have confirmatory values.

E.g., information on revenue for the current year, which can be helpful as the basis for the prediction of the revenues in future years, can also be compared with the prediction of the revenue for the current year that was made in past years. The results of those comparisons can help the user correct and improve the processes used to make those previous predictions.

Materiality in Financial Reporting

If omitted, then information is material that can be misstated or obscured. It could be reasonably expected for influencing decisions that the primary users of general purpose financial reports make based on those reports, which provide financial details about a specific reporting entity.

In other words, materiality can be an entity-specific aspect of relevance based on nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report. Consequently, the ICAI cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.

Faithful representation in Financial Reporting

Financial reports also represent economic phenomena in words and numbers. To be valid, financial information represents relevant phenomena and represents faithfulness in the substance of the phenomena that it purports for representing.

Under many circumstances, the substance of an economic phenomenon and its legal form is not different; it is considered identical. If they are not the same, then providing information only about the legal form would not faithfully represent the economic phenomenon.

A depiction will have three characteristics to be a perfectly faithful representation. It would be considered complete, neutral and free from error. Of course, perfection is seldom, if ever it is achievable. The ICAI’s objective is to maximise those qualities to the extent which is possible.

A complete depiction includes all possible information necessary for a user to understand the phenomenon depicted, including all necessary descriptions and explanations.

E.g., a complete depiction of a group of assets would be included, at a minimum. A description of the assets nature in the group, a numerical depiction of all the assets in the group, and a description of what the numerical depiction represents (for example, fair value or historical cost).

For some products, a complete depiction may also entail explanations of significant facts about the quality and nature of the items, factors, and circumstances that may affect their quality and nature, and the process can be used to determine the numerical depiction.

A neutral depiction can be occurred without any bias in the selection or presentation of financial information. A neutral depiction is not weighted, slanted, emphasised, de-emphasised or otherwise, can be manipulated for increasing the probability that the users will receive financial information can be favourable or unfavourable.

Neutral information does not mean those informations which are having no purpose or no influence on behaviour. On the contrary, by definition, relevant financial information can make a difference in users’ decisions.

The exercise of prudence supports neutrality. Prudence is the exercise of caution while making judgements under the condition of uncertainty. The exercise of prudence can indicate that assets and income haven’t overstated, and liabilities and expenses are even not understated. Equally, the exercise of prudence do not give allowances for understating.

The assets or income or the overstatement of liabilities or even expenses. Such misstatements can also lead to the overstatement or understatement of the income or various expenses in the upcoming period.

The exercise of prudence is not implied for a need for asymmetry, for example, a systematic need for more persuasive evidence to support the recognition of assets or income than the recognition of liabilities or expenses. Such asymmetrical measures is not a qualitative characteristic of useful financial information.

Nevertheless, particular Ind ASs may also contain asymmetric requirements if this is a consequence of decisions intended for selecting the most relevant information that faithfully represents what it purports for representing.

Faithful representation does not mean accuracy in all aspects. Free from error means that there are no errors or omissions in the description of the phenomenon. The process can be used for producing the reported information have been selected and applied with no errors.

In this context, free from error do not mean perfectly accurate in all aspects. For example, an unobservable price or estimated value cannot be accurate or inaccurate in determination. However, a representation of that estimation can be considered as faithful if the amount is described clearly and accurately as an estimate.

The nature and limitations of the estimated process have been explained, and no errors can be made in the appropriate selection and application process for the development of the estimate.

When monetary amounts in the financial reports cannot be directly observed, it must be estimated that measurement uncertainty arises. The use of reasonable estimation can be an essential part of preparing financial information. It does not undermine the advantage of the information if it has been estimated as clear and accurate description and explanation.

Even a high level of measurement can be an uncertain which does not necessarily prevent such an estimate from providing helpful information.

Applying the fundamental qualitative characteristics-

The information must be relevant and provide a faithful representation of what it purports to represent if it is valid. Faithful representation of an irrelevant phenomenon and even an unfaithful representation of a relevant phenomenon is much helpful for the users for making good decisions.

The process which is believed to be the most efficient and effective for applying the fundamental qualitative characteristics would usually be as follows:

Identify an economic phenomenon, information about which can be helpful for those users who are the reporting entity’s financial information.

Identification of the type of information about that phenomenon that would be most relevant.

Determination of that information is available, and it is providing a faithful representation of phenomenal economics.

If so, the satisfaction of the fundamental qualitative characteristics comes to an end at that point. If not, then the process can be repeated with the next most relevant type of information.

In some cases, a trade-off between the qualitative fundamental characteristics may be needed for making the objective of financial reporting, which is to be provided for helpful information about various economic phenomena.

E.g., the most relevant detail about a phenomenon may be estimated as a highly uncertain. In some of the cases, the level of measurement uncertainty is involved in making that estimates may be so high that it may be questionable whether the estimate would provide a sufficiently faithful representation of that phenomenon.

In some such cases, the most helpful information might be the estimate of highly uncertain, accompanied by a description of the estimate and an explanation of the affected uncertainties. In other such cases, if that information is not providing a sufficiently faithful representation of that phenomenon.,

The most helpful information may include an estimate of another slightly less relevant type, but it is subjected for lowering the measurement, which is uncertain. In limited circumstances, there may be no estimation that provides valuable information. It may be important for providing the information that does not rely on an estimate in those limited circumstances.

ENHANCEMENT OF QUALITATIVE CHARACTERISTICS:

Timeliness, Verifiability, understandability and Comparability are qualitative characteristics that have been enhanced for the usefulness of relevant information and provide a faithful representation of what it purports for representation. The enhancement of qualitative characteristics may also help determine which of two ways to depict a phenomenon if both are considered to provide equally relevant information and an equally faithful representation of that phenomenon.

Comparability in Financial Reporting

Users’ decisions are involved in choosing between alternatives, such as holding or selling an investment or investing in one of the  reporting entities or another. Consequently, details about a reporting entity are more valuable than similar information about other entities and similar information about the same entity for another period or another.

Comparability is the qualitative characteristic that helps enabling users for identifying and understanding similarities and differences among various items. Unlike the other qualitative characteristics, comparability cannot be related to a single item. At least two items are required for comparison.

Although consistency can be related to comparability, is not the same. Consistency also refers to using the same methods for the same items, either from period to period within a reporting entity or in a single period within the entities. Comparability is the goal, and consistency helps in achieving that goal.

Comparability is not uniformity. For information to be comparable, things must look alike, and different things might be also looking different. Comparability of financial information cannot be enhanced by making unlike things look alike any more than it is enhanced by making things look different.

Some degree of comparability likely can be attained for satisfaction of the characteristics of fundamental qualitative. A faithful representation of a relevant phenomena of economic can be possessed naturally with some degree of comparability with a faithful representation of a similar relevant economic phenomenon by some other reporting entity.

Although, in multiple ways, a single economic phenomenon can be faithfully represented by permitting the alternative accounting methods for the same economic phenomenon, which diminishes the comparability.

Verifiability in Financial Reporting

Verifiability helps in assuring the users that information can be faithfully represented by the economic phenomena it purports for representation. Verifiability means that different observers who are knowledgeable and independent could also reach a consensus, although it is not necessarily considered as complete agreement, that a depiction in particular is a faithful representation.

Quantified information is not needed to be a single point for estimating the verifiable. Verification of a range of possible amounts and the related probabilities can also be done.

Verification can be direct or even it can be also indirect. Direct verification means that the verification of an amount or other representation can be done through direct observation, for example, by counting of cash. Indirect verification can also means that checking the inputs to a model, formula or other technique and recalculation of various outputs can be used for the same methodology.

An example can be verified by the carriage of the amount of inventory by checking the inputs like quantities and costs and recalculation of the end inventory can use the same cost flow assumption (for example, usage of the method of first-in, first-out).

It may be impossible to verify some explanations and forward-it can  be looked as financial information until a future period. For helping the users to decide whether they want to use that information or not, it would generally be necessary to disclose the underlying assumptions, the methods of compiling the information and other factors and circumstances that support the information.

Timeliness-

Timeliness also means that having information which is available for decision-makers in time to be capable of influencing their decisions. Generally, when the information is old, the valuable of it is also low. However, some information may also be continued to be timely long after the end of a reporting period because, for example, some users may need to identify and assess trends.

Understandability-

Classification, characteristics and presentation of the information is clearly and concisely helps in making it understandable.

Inherently, some phenomena can be complex and cannot be made easily understandable. Information which are excluded about those phenomena from financial reports may make the information easier in those financial reports to understand. However, those reports will be incomplete, and it will be resulted in possible misleading.

Financial reports can be prepared for the users who are having a reasonable knowledge of business and economic activities and diligently review and analyse the information. At several times, even those users who are well-informed and diligent may need to seek the aid of an adviser to understand information about complex economic phenomena.

Applying the enhancing qualitative characteristics-

Enhancing qualitative characteristics should be increased to the possible extent. However, enhancing qualitative characteristics, either individually or as a group, cannot make valuable information if it is irrelevant or does not provide a faithful representation of what it purports to represent.

Application of the enhanced qualitative characteristics is a process that is not followed in a prescribed order. Sometimes, one enhancing qualitative characteristic might have to be diminished for maximising another qualitative characteristic. For example, a temporary reduction in comparability resulting from prospectively applying a new Ind AS may be worthwhile to improve relevance or faithful representation in the longer term. Appropriate disclosures may partially compensate for non-comparability.

THE COST CONSTRAINTS ON USEFUL FINANCIAL REPORTING:

A pervasive constraint on the provided information by financial reporting is considered a cost. Reporting financial information imposes costs and the benefits of reporting that information must justify those costs. There are several kind of costs and benefits that can be considered.

Providers of financial information can be spent or use up most of the efforts involved in processing, collecting, disseminating and verifying financial information. Still, ultimately those costs in the form of reduced returns are born by the users. Users of financial information can also incur costs of analysis and interpretation of the information which are provided. If needed, the users cannot provide information, which incurs additional costs for obtaining that information elsewhere or even estimate it.

Reporting financial information relevant and faithfully represents what it purports to represent helps users make decisions with more confidence. It results in more efficient capital markets and a lower cost of capital for the economy. An individual investor, lender or another creditor also receives benefits by making more informed decisions. However, general-purpose financial reports can’t provide all the information that every user finds relevant.

In applying the cost constraint, the ICAI assesses whether the benefits of reporting certain information are likely to justify the costs incurred to provide and use that information. When applying the cost constraint in formulating a proposed Ind AS.

The ICAI seeks information from providers of financial information, users, auditors, academics and others about the expected nature and quantity of the benefits and costs of that Ind AS. In most situations, assessments can be based on combined information of quantitative and qualitative.

Because of the inherent subjectivity, different individuals assessments of the costs and benefits of reporting particular items of financial information will vary. Therefore, the Institute of Chartered Accountants of India (ICAI) seeks to consider costs and various benefits about financial reporting generally, not just about the individual reporting entities.

This doesn’t mean that assessments of costs and benefits will always justify the exact reporting requirements for all of the entities. Differences can be appropriate because of different sizes of entities, different ways of raising capital (publicly or privately), different users’ needs or other factors.