Financial information for a business: qualitative characteristics and relevance

When making decisions, professionals need financial information that is useful, relevant, and accurate, in line with OMFP 1802/2014. To be truly useful, that information must also be comparable, verifiable, timely, and understandable.

In this article, we'll walk you through these characteristics one by one. In finance and accounting, this information is vital to the smooth running of any company, no matter its size.

Financial information: what is it?

Financial information is a set of operational and strategic data that helps with:

• understanding and managing cash flow;
• accessing various sources of financing (for example, factoring);
• organizing the budget;
• analyzing investments;
• making important financial decisions.

Financial information can be confused with accounting information, but there is a subtle difference between the two.

The former includes quantitative information, expressed in monetary units, and qualitative information, which together show an entity's performance and financial position. It is useful when making economic decisions. Among other things, financial information can be obtained by analyzing cash flows.

By comparison, accounting information uses the accrual basis and refers to a company's accounts, costs, assets, profit, and other accounting items.

Financial information: what are its qualitative characteristics?

According to Order no. 1802/2014 of the Ministry of Public Finance, Chapter 2, Section 2.3, entrepreneurs need financial information that is, first and foremost, useful. That means it must be relevant and faithfully represent what it is meant to show.

Relevance

This characteristic refers to information's ability to help users make a decision. To do that, it must meet two conditions: it must have predictive value and/or confirmatory value.

Predictive value means the information can be used to forecast future results. Even so, it does not present a prediction or forecast itself, which is why people use it to make their own predictions.

Sometimes information with predictive value also has confirmatory value. One example is information about revenue for the current year, which can be used as a starting point for forecasting revenue in future years. It can be compared with forecasts made in previous years about the current financial year.

Faithful representation

In annual financial statements, economic phenomena are represented through numbers and words. Faithful representation means a complete, objective, and error-free description. A complete description must include all the financial information a professional needs to understand the nature of the financial phenomenon.

For example, the description of a group of assets will include the following elements:

• A description of the nature of the assets;
• A numerical description of all assets;
• A note on the numerical description, such as historical cost or fair value.

In some cases, a complete description may also require explanations about the quality and nature of the items, the factors involved, and the context that could affect the quality, nature, and process used to determine the numerical descriptions.

An objective description means the selection and presentation of financial information should not be influenced by specific factors. According to OMFP 1802/2014, “a neutral description is not distorted, weighted, emphasized, deemphasized, or otherwise manipulated to increase the likelihood that financial information will be received favorably or unfavorably by users”.

Comparability

Information becomes more useful when it can be compared with similar information from other entities, or with information from the same entity from different periods or dates. This makes it easier to identify similarities and differences between financial phenomena.

Comparison requires at least two elements, unlike the other qualitative characteristics. A faithful representation of a relevant economic phenomenon has a certain degree of comparability with that of a similar phenomenon.

Verifiability

It helps users make sure information faithfully represents the economic phenomena it is meant to represent. In other words, independent, knowledgeable observers can reach a consensus on whether a description is accurate.

Verification can be of two types:

1. Direct verification means checking a value or representation through direct observation, for example by counting money.
2. Indirect verification refers to checking the inputs for a model, formula, or other technique, as well as recalculating the results using the same methodology. For example, when verifying the book values of inventory, the inputs (quantities and costs) are checked and the ending inventory is recalculated using the same assumptions about cost flow.

Timeliness

Timeliness means information is available to decision-makers in time for them to act. Once information gets old, it is no longer as useful. Some information can still remain useful for longer, even after the end of the reporting period.

Understandability

It comes from classifying, characterizing, and presenting information in a transparent and concise way. The complexity of some financial phenomena means information cannot always be simplified enough to become easy to understand. For that reason, leaving it out of financial reports would lead to incomplete reporting.

In fact, financial reports, annual financial statements, and the documents published alongside them are prepared specifically for people with knowledge of business and economics, so they can study and analyze that information carefully. Even so, these documents are presented in a way that other categories of users can understand as well.

Conclusions

The more comparable, verifiable, understandable, and timely financial information is, the more useful it becomes. In finance, information must support and benefit both companies and the different categories of users interested in it.

Financial information must reflect as faithfully as possible the position and performance recorded during a financial year. At company level, it must include a description of economic resources, completed transactions, and the results achieved.

Understanding the information that shows a company's financial performance and position gives any entrepreneur a competitive advantage. For example, during an economic or financial crisis, financial information that is available to key decision-makers and used properly can help deliver long-term economic benefits. If that information is missing, a company's operations and future may be compromised, leading to lost benefits or even bankruptcy.