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Cella Corporation's statement of financial position shows property, plant, and equipment of $100,000. The notes to...

Cella Corporation's statement of financial position shows property, plant, and equipment of $100,000. The notes to its financial statements state that the amount is represented by a cost of $600,000, accumulated depreciation of $300,000, and accumulated impairment losses of $200,000. Discuss the usefulness of the information provided, referring to the qualitative characteristics identified in the conceptual framework for financial reporting .

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Answer #1

The Conceptual Framework (2010) identifies relevance and faithful representation as the two fundamental qualitative characteristics which make financial information useful. Financial information is relevant if it would potentially affect or make a difference in a user’s decision. Faithful representation relates to the fact that information that faithfully represents an economic phenomenon that it allegedly represents is ideally complete, neutral, and free from error.

The Conceptual Framework (2010) also identifies comparability, verifiability, timeliness, and understandability as the four enhancing qualitative characteristics:-

  • Comparability permits the identification and understanding of similarities and differences between items of information.
  • Verifiability means that different observers would independently agree that the information that is presented faithfully represents the economic phenomena that it alleges to represent.
  • Timeliness means that information is available to decision-makers on a timely basis prior to the need for a decision to be made.
  • Understandability means that the information should be understandable by users who have a reasonable knowledge of business and economic activities, and who are willing to diligently study the information.

The financial effects of transactions and other events are represented in financial statements by grouping them into broad classes or elements according to their economic characteristics.

Qualitative characteristics are either fundamental or enhancing, depending on how they affect the decision-usefulness of information. Regardless of classification, each qualitative characteristic contributes to the decision-usefulness of financial reporting information. Relevant information also helps users confirm or correct prior expectations; it has confirmatory value.

In the present case, Cella Corporation has made full disclosure with regard to items that have been considered to depreciate the value of PPE i.e from $600000 to $100000. This has been done in order to comply with qualitative characteristics and provide users with necessary information so that they can make informed decisions.

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