3.1 Qualitative Characterics SFAC No. 2
Primary Qualities Secondary Qualities
Webster defines qualityas the essential character of something, its nature, or degree of excellence.  Now, relate this definition of qualityto accounting information.  The definition implies that some types of accounting information may be more important than others.
One of the basic objectives of financial information from SFAC No. 1 is that accounting information should be useful to decision-making.  When related to the definition of qualitythis suggests that accounting information that helps someone to make a decision should be considered more useful (i.e., would therefore be more "excellent") than information that did not contribute to the making of the decision.
SFAC No. 2 describes the characteristics of accounting information and explains why in certain situations, one type of accounting information may be more important than another. SFAC No. 2 presents a hierarchy that you can use to assess the importance of different types of accounting information.  The hierarchy is depicted in the following diagram.
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3.1.1 Primary Qualities
SFAC No. 2 states that the primary qualitiesthat make accounting information useful for decision making are relevanceand reliability.
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For accounting information to be relevant, it must be information needed to help make the decision at hand, at the moment.
  • Accounting information that is not needed to make a decision is considered to be irrelevantto the decision at hand, at the moment.
 
 
 
 
SFAC No. 2 suggests that for accounting information to affect a decision that it being made, the information should:
  • Help predict the outcome of the decision  (e.g., Knowing a company's net income for several periods could affect the decision to buy a company's stock by suggesting that if a company has had positive earnings over time that it could be reasonably expectedto have positive earnings in the future).
  • Provide feedback that affirms or denies the decision maker's expected outcome(e.g., When an investor studies charts indicating projected movement in a stock's price, the information is the chart either supports or denies the investor's expectation for future price movement.)
  • Be timely(e.g., This means that for information to be useful in reaching a decision, it must be in the decision maker's hand at or before the moment the decision is made.  Information that arrives after a decision is made, may be "good stuff" but at that point the information has become irrelevant to the decision that "has already been made.")
 
 
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For accounting information to be reliable, it must be dependable and trustworthy.
 
 
 
 
Accounting information is reliableto the extend that it is:
  • Verifiable:  means that information has been objectively determined, arrived at, or created.  More than one person could consider the facts of a situation and reach a similar conclusion.
  • Representationally faithful:  that something is what it is represented to be.  For example, if a machine is listed as a fixed asset on the balance sheet, then the company can prove that the machine exists, is owned by the company, is in working condition, and is currently being used to support the revenue generating activities of the company.
  • Neutral:  means that information is presented in accordance with generally accepted accounting principles and practices, and without bias. Neutrality is somewhat reflects Sgt. Friday's statement, "the facts, only the facts."
 
 
3.1.2 Secondary Qualities
The primary qualitiesof accounting information go to the heart of what is recorded in the books of a company and to the usefulness of that information for decision making on behalf of the company.  Secondary qualitiesgo beyond the information needs of a single company by placing a greater emphasis on usefulness of information by other types of users and upon how a company does its accounting and reporting from one period to the next.
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Secondary qualities include:
  • Comparability:  suggests that accounting information that has been measured and reported in a similar manner by different enterprises should be capable of being compared because each of the enterprises is applying the same generally accepted accounting principles and practices.
  • Consistency:  suggests that an entity has used the same accounting principle or practice from one period to another, therefore, if the dollar amount reported for a category is different from one period to the next, then chances are that the difference is due to a change like an increase or decrease in sales volume rather than being due to a change in the method of calculating the dollar amount.
 
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