The Public Accounts Committee of Parliament has bemoaned the state of financial reporting in the Metropolitan, Municipal and District Assemblies (MMDAs). According to the Chairman, the financial statements fall short of confirmatory and predictive value. In fact, the financial statements are characterised by errors, omissions and misstatements, and as if this is not enough, the final reports are approved at a later year. The citizens also complain seriously about their inability to appreciate the information reported robbing them of their right to assess accountability of the government.
Required:
Explain FOUR qualitative characteristics that the final reports of MMDAs fall short of in accordance with IPSAS 1: Presentation of Financial Statements. (4 marks)
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Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. They are applicable to financial statements, regardless of the basis of accounting used to prepare the financial statements. The four principal qualitative characteristics are understandability, relevance, faithful representation and comparability.
- Understandability
Information is understandable when users might reasonably be expected to comprehend its meaning. For this purpose, users are assumed to have a reasonable knowledge of the entity’s activities and the environment in which it operates, and to be willing to study the information .Information about complex matters should not be too difficult for certain users to understand. - Relevance
Information is relevant to users if it can be used to assist in evaluating past, present or future events or in confirming, or correcting, past evaluations. In order to be relevant, information must also be timely. - Materiality
The relevance of information is affected by its nature and materiality. Information is material if its omission or misstatement could influence the decisions of users or assessments made on the basis of the financial statement. Materiality depends on the nature or size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful. - Faithful Representation
For information to represent faithfully transactions and other events, it should be presented in accordance with the substance of the transaction and other events, and not merely their legal form. - Substance Over Form
If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. The substance of transaction or other events is not always consistent with their legal form. - Neutrality
Information is neutral if it is free from bias. Financial statements are not neutral if the information they contain has been selected or presented in a manner designed to influence the making of a decision or judgment in order to achieve a predetermined result or outcome. - Prudence
Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or revenue are not overstated and liabilities or expenses are not understated. - Completeness
The information in financial statements should be complete within the bounds of materiality and cost. - Comparability
Information in financial statements is comparable when users are able to identify similarities and differences between that information and information in other reports. Comparability applies to the: Comparison of financial statements of different entities; and Comparison of the financial statements of the same entity over periods of time. An important implication of the characteristic of comparability is that users need to be informed of the policies employed in the preparation of financial statements, changes to those policies and the effects of those changes.