10 Characteristics of Financial Statements, its Types, Features and Functions

quality of financial statements

They are relevance, reliability, objectivity, ability to be understood, comparability, realism, consistency, timeliness, economy of presentation, and completeness. The qualitative characteristics of financial reporting are very much important to the external users in making their economic decisions. In many countries, companies are obliged to render accounts to the State through frequent financial statements, through commercial registries and other types of control institutions. In this way , changes in the organization’s patrimony can be faithfully known and possible cases of illicit management, corruption or evasion of taxes and responsibilities can be attended to.

quality of financial statements

And a number of failures of GAAP and financial disclosures are identified which, if not recognized, can promote momentum investing and stock market bubbles. Section 3 discusses

motivations that might cause, and conditions that might enable, management to issue

financial reports that are not high quality and mechanisms that aim to provide discipline

to financial reporting quality. Section 4 describes choices made by management that

can affect financial reporting quality—presentation choices, accounting methods, and

estimates—as well as warning signs of poor-quality financial reporting.

What are the main components of financial reporting?

Beyond this basic

level, as the quality of reporting increases, the ability of financial statement users

to correctly assess earnings quality and to develop expectations for future performance

arguably also increases. This reading focuses on reporting quality and the interrelated attribute of results

quality. Note that the term “earnings quality” is more commonly

used in practice than “results quality,” so throughout this reading, earnings quality

is used broadly to encompass the quality of earnings, cash flow, and/or balance sheet


quality of financial statements

Effective reporting is only defined by the results obtained by reviewing the report data and making changes to improve performance of the team or individual. … A consistent measurement and reporting methodology creates an environment of achievement and success that benefits the entire organization. Financial reports provide information on the entire company while managerial reports Focus specifically on management’s needs.


In July 2019, ESL announced that a review had been conducted into its prior year financial statements. Following this review, in 2020, ESL disclosed significant prior year accounting adjustments to the 2017 financial year. KPMG and Ms Quayle breached Relevant Requirements in some of the areas which were subject to prior year adjustments. ASIC expects investors to be properly informed about “the impact of changing and uncertain economic and market conditions, ‘net zero’ targets and other developments on financial position and future performance”. The most important financial statement for the majority of users is likely to be the income statement, since it reveals the ability of a business to generate a profit. Entities must disclose that they have applied the exception, including at 30 June 2023.

  • Amendments to IFRS® Accounting Standards issued by the IASB in late May 2023 introduce additional disclosure requirements around supplier finance arrangements in financial reports.
  • My premise is that financial reporting should serve as an anchor during bubbles, to check speculative beliefs.
  • The financial statements must be the product of specialized professional investigations , and not of subjective appraisals or speculations.

Earnings can be termed “low quality” either because the reported information properly

represents genuinely bad performance or because the reported information misrepresents

economic reality. In theory, a company could have low-quality earnings while simultaneously

having high reporting quality. Consider a company with low-quality earnings—for example,

one whose only source of earnings in a period is a one-off settlement of a lawsuit

without which the company would have reported huge losses. The company could nonetheless

have high reporting quality if it calculated its results properly and provided decision-useful


What are the six components of financial statements?

Further, the disclosures in the financial statements relating to the property transactions did not adequately explain the impact of those transactions on ESL’s financial performance. Supplier finance remains a significant focus of users, regulators and standard-setters. Given the market interest in this topic, entities may consider adopting some or all of the new disclosure requirements in the June 2023 and December 2023 reporting periods, even though the disclosures are not mandatory for these reporting periods. Tier 1 financial reports will need to include disclosure about any material impacts of the amending standard where it is not early adopted. An example of early recognition of an ultimate financial disaster is James Chanos’s

short position in Enron in November 2000 —more than a year before Enron filed for bankruptcy protection (in December 2001).

  • Supplier finance remains a significant focus of users, regulators and standard-setters.
  • Low-quality financial reporting

    contains inaccurate, misleading, or incomplete information.

  • Please see About Deloitte to learn more about our global network of member firms.

ASIC’s focus areas for 30 June 2023 financial reports call on directors, preparers and auditors to assess the impact of uncertain market and economic conditions on reporting for full and half-years endings on 30 June 2023. Read our Clarity publication Responding to Pillar Two to help you to understand and apply the amendments. The publication explains the amendments, outlines how they relate to the Pillar Two transition process, and provides illustrative disclosures for financial reports around the impacts of Pillar Two.

How can I improve my reporting?

Once Pillar Two legislation is substantively enacted, additional disclosures about the impact of Pillar Two on the entity will be required until such time as the legislation applies to the entity. The entity will then separately disclose the amount of current tax arising from Pillar Two taxes. The preparation of the financial statements must obey the occasion , taking into account their periodicity, their strategic and communicative importance and the need to be able to count on them for subsequent revisions in time .