May 2016 Q7 b.

The IASB states that there are four principal characteristics- understandability, relevance, reliability/faithful representation and comparability.
(a) Understandability: Information provided to users must not be so complex that a user with a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence, would not be able to understand it. There is a fine balancing act needed here by those preparing financial statements to ensure that all information relevant to users is given to them even though it may be complex.
(b) Relevance: To be useful, information must be relevant to the decision-making needs of users. Relevance is closely related to its predictive role- that is the extent to which the information helps users to predict the organisation’s future and so make decisions about it. For example, the attempt by a potential investor to predict future profitability and dividend levels will be at least partly based on the financial statements. A sub characteristic to relevance is materiality- information is material and therefore relevant if its omission or misstatement could influence the economic decisions of users. Materiality depends of the size of the item or error judged in the particular circumstances.
(c) Reliability/Faithful representation: Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. There is quite often a conflict between relevant and reliable information. Information may be relevant, but so unreliable in nature or representation that its recognition may be potentially misleading. For example, if the validity and amount of a claim for damages under a legal action are disputed, it may be inappropriate for the business to recognise the full amount of the claim in the statement of financial position as this would provide unreliable information. However, to ensure relevance, it would be appropriate to disclose the amount and circumstances of the claim in a note to the accounts.
(d) Comparability: Users need to be able to compare financial statements of a business through time in order to identify trends in its financial position and performance. Users also need to be able to compare one business with another and, therefore, the measurement and display of the financial effect of transactions and other events must be carried out in a consistent way for different entities. Thus, we have the need for accounting standards from this characteristic.