Qualitative Characteristics of Financial Statements:

Financial statements are the primary means of communication between the company and its stakeholders. Therefore, it is essential that the financial statements are reliable, relevant, and understandable. The International Financial Reporting Standards (IFRS) have identified two primary qualitative characteristics of financial statements:

Relevance:

The relevance of financial statements means that they provide information that is useful for making decisions. Relevant information must have predictive value, confirmatory value, and materiality.

- Predictive Value: Financial statements should provide information that is useful in predicting future events. For example, a company's past performance is an indicator of its future performance.
- Confirmatory Value: Financial statements should provide information that confirms or changes the expectations of stakeholders. For example, if a company reports better than expected earnings, it confirms the stakeholders' expectations of the company's performance.
- Materiality: Financial statements should include all material information that could impact the stakeholders' decisions. Materiality is determined by the size, nature, and impact of the item.

Reliability:

The reliability of financial statements means that they provide information that is free from bias and error. Reliable information must have the qualities of completeness, neutrality, and verifiability.

- Completeness: Financial statements should include all relevant information that could impact the stakeholders' decisions. Incomplete information can lead to incorrect conclusions and decisions.
- Neutrality: Financial statements should be free from bias and should not favor any particular stakeholder. Neutral information is essential for making unbiased decisions.
- Verifiability: Financial statements should be supported by evidence that can be verified by an independent party. Verifiable information enhances the reliability of financial statements.

Conclusion:

Thus, the primary qualitative characteristics of financial statements are relevance and reliability. Relevance ensures that financial statements provide useful information for making decisions, while reliability ensures that the information is free from bias and error.