Last update 25/08/2019
An enhancing qualitative characteristic possessed by financial information that is classified, characterised and presented clearly and concisely.
The Conceptual Framework provides the following guidance [Conceptual Framework 2.34 – 2.36]:
Classifying, characterising and presenting information clearly and concisely makes it understandable.
Some phenomena are inherently complex and cannot be made easy to understand. Excluding information about those phenomena from financial reports might make the information in those financial reports easier to understand. However, those reports would be incomplete and therefore possibly misleading.
Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently. At times, even well-informed and diligent users may need to seek the aid of an adviser to understand information about complex economic phenomena.
Understandability in accounting information implies clarity. Companies must follow standard accounting principles in order to properly report business transactions. If a company fails to do so, then stakeholders are typically unable to follow the company’s accounting information. Essentially, companies that report financial information in their own specific manner strip away understandability and the ability to understand financial reporting.
When companies follow standard accounting principles, understandability increases among stakeholders. This also leads to consistency in financial reporting. Consistency means a company handles its business transactions the same way each time they occur. When a company comes to rely on these attributes, then reasonable expectations begin. For example, stakeholders believe they can predict how a company will perform financially based on previous financial information.
Or….
A principle of accounting which states that a company’s financial information should be presented in such a way that a person with a reasonable knowledge of business and finance, and the willingness to study the information, should be able to comprehend it.
Or….
Understandability requires the information presented in financial reports to be concise, complete and clear in presentation. The information should be presented so as to facilitate the user of the information.
However, understandability never prescribes any complex information to be omitted altogether due to its underlying difficulty in understanding. It just requires us to disclose the information systematically instead of presenting it haphazardly.
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