Speaker 1: Good morning dear students, today we will discuss Qualitative Characteristics of Financial Statements. First of all, what do you mean by Qualitative Characteristics of Financial Statements? Whenever we talk about Qualitative Characteristics, what do we understand from it? This means certain features, some qualities. So when I am talking about Qualitative Characteristics of Financial Statements, it means that there should be certain features in my financial statements. Some features are required for financial statements to be useful for the users of accounting information. So let's have brief introduction about this. Whenever I will talk about qualitative characteristics or financial statements, the accounting information that our financial statements provide is very important for our business, investors, creditors or for other stakeholders, it is very important. So these financial statements give us useful information and are relevant for us. So that the purpose for which we want to use them, they can fulfill that purpose. There are certain accounting standard bodies like IASB which is International Accounting Standard Board and FASB that is Financial Accounting Standard Board. They have laid down some characteristics that these qualitative characteristics should be there in our financial statements for these financial statements to be very useful for the users of this accounting information. So you can say what are the qualitative characteristics, these are the attributes that makes the information provided in the financial statement useful, that the information our financial statements are giving can be useful for users, there should be certain characteristics and these characteristics or attributes are known as qualitative characteristics. What is the ultimate reason? So that the investors can take their investment decisions in a better way with the help of their financial statements. So different different qualitative characteristics are given by these accounting bodies. We will discuss these qualitative characteristics one by one. First of all, when I talk about these characteristics, I will divide it into two parts. One is primary, one is secondary. Primary characteristics means which should be there, the very first main characteristics and that is relevance as well as reliability. Secondary jo in primary characteristics mein add karte hain that is comparability as well as consistency. So first of all primary secondary then primary further divided into two parts relevance and reliability, then relevance further divided into four parts that is feedback value, predictive value, timeliness, materiality. Reliability further divided into verifiability, neutrality as well as faithful representation and faithful representation is further divided into completeness, error free from error as well as understandability. And secondary there are two secondary qualitative characteristics one is comparability and second is consistency. So, we will discuss all these characteristics one by one first of all we will discuss primary characteristics and under primary characteristics we have the very first important characteristic that is relevance. Relevance as the name is suggesting relevance ka matlab ki jo hamari financial statements should be relevant or you can say that the information provided by this financial statement should be relevant and when will it be relevant, when this information has a potential to influence the decision of the users that they can influence their decision by helping them to evaluate the past events, of course the present as well as the future events. Kisi bhi accounting information ko relevant hone ke liye isme yeh chaar characteristics hona zaruri hai and what are these four characteristics the very first one is feedback value. Very first one is feedback value. Feedback value means ki yeh information humein koi feedback deriye aur feedback ye tabhi If it confirms the previous expectations as well as it helps you in the assessment. For example, you are getting EPS from financial statement. per share like in a very first year. Suppose I talk about 2021. So in that my EPS or earning per share was Rs. 5. Then I talk about 2022. So in that my EPS from financial statements I can see that EPS is 6. So that means it is telling me, this accounting information It is telling me that every year EPS is increasing, so it can help me in assessment of the EPS of this particular company that if its earning per share was Rs.5 in 2021, so in 2022 it became Rs.6. So it is you can say assessing or it is helping me in assessment of the previous information. When I talk about predictive value, so predictive value means it is helping me to make top predictions. If this information is helping me to make predictions and you can say it has a predictive I will say that these financial statements are relevant for the users. If I write 2023 here, if my EPS is Rs. 7, then these over the year financial statements it is also offering me the feedback value as well as predictive value. Now, I can predict that if in 2021 I had Rs.5, Rs.6 in Rs.2, Rs.7 in Rs.3, then it is possible that in 2024 my earning per share will be Rs.8. So, on the basis of this accounting information, I can predict earning per share of the coming year. So, if I can, it means these financial statements has a predictive value, right. Next comes the timeliness, timeliness ka matlab to provide the information to the users when they need it most to make the decisions, matlab jab unko chahiye, users ko information chahiye unko usi time pe provide karna. Obviously, if you do not provide information on time, then there will be no relevance of that information. So, financial statements must have this characteristic that is the timeliness, means to provide the information to the users when they need it most to make the decisions. Now the last characteristic under relevance is materiality, materiality as we have already discuss in our concepts and conventions, materiality means the information which influence the economic decisions of the users. So financial statements must provide us material information means the relevant information or you can say important information which will help them in taking various decisions. irrelevant or immaterial information should not be provided under in the financial statements. So this is what is the relevance in which we are talking about ki koi financial statement tabhi relevant hongi agar unmei feedback value hai. If it is having a feedback value and it is having a predictive value means yeh hume feedback theory about the past or the coming time about the future we can predict it and the information is provided as and when it is required and of course it is providing us significant or material information. So if our financial statements are providing us these characteristics, if there are these characteristics then we will say that it is relevant in financial statements. Now come to the second qualitative characteristic which is known as reliability. What do you understand by reliability? Reliability means on which we can rely. On which information you can rely. So, when I am talking about reliability, there are three characteristics under it, Verifiability, Neutrality and as well as Faithful Representation. So, first of all, I will talk about Verifiability. Verifiability means we can verify this information. Verifiable information means that people with different types of knowledge and independent people can use the same method to find out similar conclusions about the information. For example, I have given financial statements and I have taken current ratio from financial statements and I have got current ratio from financial statements that is 2 is to 1. there is one more person, you know, a lag lag independent observer or different knowledgeable persons. There is one more person usne bhi agar current ratio nikalniye by applying the similar methods right. We have certain rules or we have certain formulas for calculation of current ratio aur wo bhi agar ussi formula se current ratio nikal raha hai aur uski bhi ratio kitni aani chahiye 2 is to 1. If this is there, then I can say that my financial statements are verifiable, they are providing verifiable information to me. Now second important feature is neutrality, neutral means that you are free, neutral means neutral from any kind of things. So information should be neutral or you can say free from intentional or unintentional bias. It means that our information has no bias in any way, whether we talk about intentional bias or unintentional bias. So it means that our information is not favoring anyone or providing negative information to So that means the information or you can say financial statements have the feature of neutrality. Next we have faithful representation. Faithful representation means all the figures and descriptions which is given in the financial statement that match, match what really exist in the business or what actually happened means my financial statements are showing me true picture true picture means if I am saying my business is going very well so my financial statements are showing very positive figures it is showing me increased sales it is showing me good growth rate it is showing me increased profits it is showing me increased earnings per year more earnings, more dividends, so that means my figures and whatever the descriptions are there in financial statements, wo bilkul faithful representations de rahe hain, agar humaari financial statements alag cheez bata rahe hain as compared to what actually it is, that means it is not faithful representation, a faithful representation ko complete karne further it has to have three characteristics. First of all completeness. Completeness means whatever information is required that should be included and there should not be any omissions. We did not omit anything. Each and every information which is required as per standards is mentioned in my financial statements. That means my information is complete. Second is free from error. Free from error means the information should be accurate and it should be free from any mistakes or misrepresentations. कि मैंने कोई भी अपनी information जो हैं उनको जान बूच कर. जान बूच कर. Mistakes means may be unintentionally हमने कुछ गलत लिख दिया. means intentionally I have presented my information wrongly so that I can give a wrong, you know a signal to my users of accounting information. So free from error means there is no error in it, I have not made any misrepresentation and I have not made any mistake while preparing my financial statements. Now third is understandability, understandability means whatever information is presented in my financial statements that is clear and it is understandable to the users, means whatever information I am presenting that is given as per the standards, as per the rules, there is no confusion in it, okay and it is understandable by the users, by the persons who want to use that particular information. So if these three characteristics are there, means completeness, free from error, understandability then what I will say that my financial statements have faithful representation and if it has faithful representation, neutrality, verifiability then what I will say that my financial statements has qualitative characteristic of reliability or you can say the information provided by my financial statements are reliable. Now apart from these two main primary characteristics, I have secondary characteristics and under secondary characteristics the first one is comparability. Now information comparable kab hogi? When users can collect different information and can compare it over the period or can compare one company's information with another company. So I can say information is comparable when the users can identify similarities, they can identify similarities as well as the differences in the economic events like for example, sale, purchase, expenses, income, gains, inflows, outflows, the similarities and differences of the same entity, the information of the same entity from one period to another period they can compare or between the companies like for example if I am talking of the same entity means if I can compare the information of 2022 and 2023 then I will say that my financial statements have the characteristics of comparability or between the companies means if there are two companies are X limited and Y limited and I want to know which company is running more efficiently. So if I can compare their financial statements to know which one is more efficient that means financial statements have the characteristics of comparability. So this is what it want to say that my financial statements should be comparable and when will when we use a similar standards, jaise aaj kal if I am talking about the similarities or comparability, these days we are talking about IFRS, IFRS means the single set of accounting standards which are applicable globally. So what is the objective? Of course to ensure the comparability ki aap all over the world single set of accounting standards use karo so that hum information over the you can say different different companies ke beech mein hum is information ko compare kar sake and of course over the year hum is information ko compare kar sake. Now the last characteristic here is the consistency and when I am talking about when I am talking about consistency this means that there should not be frequent changes in the accounting policies. Accounting policies may frequent changes like for example simple some method depreciation If I put return down value in 1st year, in 2nd year I put straight line method, in 3rd year I put machine or rate method, then over the year I will not be able to compare my profitability because I am using different method. Similarly, these different methods can affect my profitability. I can have over the period different different figures not because I am operating efficiently or not operating efficiently but just because I am changing my accounting policies frequently. So you can say that my financial statements will not have consistency and of course when there is no consistency there will be no comparability. So that's why we don't want to make frequent changes in our accounting policies or we won't be able to do comparison which we studied in 1st, 2nd and 3rd characteristics. If there is no consistency then we can't ensure our comparability. So, we have to ensure same accounting policies in order to ensure consistency and of course, if there will be consistency, the comparability will be done easily. So, this is about all the characteristics. So, in the conclusion, we can say that all these qualitative characteristics are required for making the information more reliable, relevant and useful to its users in making the informed decision, in making the analysis with the help of this financial, with the help of these financial statements and if we ensure all these qualitative characteristics, then our financial reporting will be better, it will be more transparent and of course the users, their confidence will increase in our financial information.