Financial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making. The purpose of financial reporting is to provide stakeholders with a clear and accurate picture of the financial health and performance of the organization, so that they can make informed decisions about their investment or other relationship with the company. Financial reporting is governed by Generally Accepted Accounting Principles (GAAP) in the United States, and International Financial Reporting Standards (IFRS) in many other countries.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION
The International Accounting Standards Board (IASB) has identified four qualitative characteristics of accounting information that are considered to be important for decision-making: understandability, relevance, reliability, and comparability.
- RELEVANCE : Accounting information is considered relevant if it has the ability to make a difference in the decision-making process of the user. It means that the information should be timely and have a direct impact on the current or future decisions of the user. For example, if a business owner is looking to invest in a new product line, the financial statements of the company's past performance would be relevant information to consider.
- RELIABILITY : Accounting information is considered reliable if it is accurate and consistent. It means that the information should be free from material errors and bias, and should be able to be replicated by other users. For example, if a business owner is looking to acquire another company, the financial statements of the target company should be reliable in order for the owner to make an informed decision.
- COMPARABILITY : Accounting information is considered comparable if it can be used to compare the financial performance of different entities. It means that the information should be presented in a consistent format and should be comparable across different periods of time. For example, if a business owner is looking to compare the financial performance of their company to that of their competitors, the financial statements should be presented in a comparable format.
- UNDERSTANDABILITY : Accounting information is considered understandable if it is presented in a clear and concise manner that is easy for the user to comprehend. It means that the information should be presented in a logical and organized manner, and should be accompanied by appropriate disclosures and explanations. For example, if a business owner is looking to understand the financial performance of their company, the financial statements should be presented in a manner that is easy for the owner to understand.