Conceptual Framework for Financial Reporting

Applying the fundamental qualitative characteristics
Information must both be relevant and provide a faithful representation of
what it purports to represent if it is to be useful. Neither a faithful
representation of an irrelevant phenomenon nor an unfaithful representation
of a relevant phenomenon helps users make good decisions.
The most efficient and effective process for applying the fundamental
qualitative characteristics would usually be as follows (subject to the effects of
enhancing characteristics and the cost constraint, which are not considered in
this example). First, identify an economic phenomenon, information about
which is capable of being useful to users of the reporting entity’s financial
information. Second, identify the type of information about that phenomenon
that would be most relevant. Third, determine whether that information is
available and whether it can provide a faithful representation of the economic
phenomenon. If so, the process of satisfying the fundamental qualitative
characteristics ends at that point. If not, the process is repeated with the next
most relevant type of information.
In some cases, a trade-off between the fundamental qualitative characteristics
may need to be made in order to meet the objective of financial reporting,
which is to provide useful information about economic phenomena. For
example, the most relevant information about a phenomenon may be a highly
uncertain estimate. In some cases, the level of measurement uncertainty
involved in making that estimate may be so high that it may be questionable
whether the estimate would provide a sufficiently faithful representation of
that phenomenon. In some such cases, the most useful information may be
the highly uncertain estimate, accompanied by a description of the estimate
and an explanation of the uncertainties that affect it. In other such cases, if
that information would not provide a sufficiently faithful representation of
that phenomenon, the most useful information may include an estimate of
another type that is slightly less relevant but is subject to lower measurement
uncertainty. In limited circumstances, there may be no estimate that provides
useful information. In those limited circumstances, it may be necessary to
provide information that does not rely on an estimate.