Notes to the Financial Statements and Qualitative Characteristics

Numbers on the face of a financial statement tell only part of the story. A reader needs to know who the entity is, what law governs it, what it does, on what basis and in what currency the figures are stated, which accounting policies were used and what lies behind each line. That is the work of the notes.

And behind the whole set of statements stands a question: what makes accounting information good enough to rely on? The accounting standard answers it with the qualitative characteristics: the attributes that make information useful to the people who use it.

They are the test that every accounting policy, every estimate and every disclosure must pass. They are examined directly in several diets, usually as a request to identify and explain four of them.

This topic covers the information that must be displayed prominently and the contents of the notes; and the qualitative characteristics: understandability, relevance, materiality, reliability, faithful representation, substance over form, neutrality, prudence, completeness, comparability, timeliness and the balance between cost and benefit, with examples. The next topic is the standard on first-time adoption of accrual basis International Public Sector Accounting Standards.

The qualitative characteristics were tested in May Diet, 2021, Question 1(d) (four characteristics, as required by the appendix of the standard on presentation), in May Diet, 2023, Question 1(b) (four characteristics, 8 marks) and in May Diet, 2025, Question 1, which asked for brief explanations of materiality and other characteristics. Read the standards on financial statements, cash flows and accounting policies first.

Notes to the financial statements

Each component of the financial statements must be clearly identified. In addition the following must be prominently displayed, and repeated where needed for a proper understanding of the information:

1. the name of the reporting entity or other means of identification;
2. its domicile and legal form;
3. a description of the nature of its operations;
4. the extent to which transitional provisions have been used;
5. whether the statements cover the individual entity or the economic entity;
6. additional information not presented on the face of the statements but necessary for a fair presentation;
7. the reporting date or the period covered;
8. the reporting currency;
9. a reference to the legislation governing its operations;
10. the level of precision used in presenting figures;
11. information required by the standards that is not presented elsewhere;
12. a statement of the measurement basis (or bases) and the accounting policies applied, and a statement of compliance with the standards;
13. supporting information for items on the face of each statement, in the order in which the line items and statements are presented; and
14. other disclosures, including contingencies, commitments and other financial disclosures, and non-financial disclosures.

Qualitative characteristics of financial reporting

The standard requires accounting policies to be developed so that the statements provide information that meets a number of qualitative characteristics. Qualitative characteristics are the attributes that make the information in financial statements useful to users. The four principal ones are understandability, relevance, reliability and comparability.

Understandability

Information is understandable when users can reasonably be expected to comprehend its meaning. Users are assumed to have a reasonable knowledge of the entity’s activities and its environment and to be willing to study the information. Complex matters should not be left out merely because some users may find them hard.

Relevance

Information is relevant if it can help users to evaluate past, present or future events, or to confirm or correct past evaluations. To be relevant it must also be timely.

Materiality

Information is material if its omission or misstatement could influence the decisions of users or assessments made on the basis of the statements. Materiality depends on the nature or size of the item judged in the circumstances. It is a threshold or cut-off point and not a primary characteristic that information must have to be useful.

Example: a misstatement of ₦4m in revenue of ₦900m is 0.4% of revenue and may be immaterial by size, but the same ₦4m is material by nature if it hides a payment to a related party or turns a deficit into a surplus.

Reliability

Reliable information is free from material error and bias and can be depended on by users to represent faithfully what it purports to represent or could reasonably be expected to represent. It has these aspects:

• Faithful representation: transactions and events are presented in accordance with their substance, not merely their legal form.
• Substance over form: transactions are accounted for and presented in accordance with their substance and economic reality, and not merely their legal form, which is not always consistent with the substance. Example: an agreement under which the entity uses a ₦20m machine for almost all of its life and bears its risks is, in substance, a purchase financed by borrowing, even if legal title stays with the lessor.
• Neutrality: information is free from bias. Statements are not neutral if selected or presented to influence a decision or judgement to reach a predetermined result.
• Prudence: a degree of caution in the judgements needed for estimates under uncertainty so that assets or revenue are not overstated and liabilities or expenses not understated. It does not allow hidden reserves or excessive provisions, or deliberate understatement of assets or revenue or overstatement of liabilities or expenses, because the statements would no longer be neutral and so not reliable. Example: receivables of ₦10m with an expected loss of 8% give an allowance of ₦0.8m and net receivables of ₦9.2m; adding a further ₦3m “just in case” would be a hidden reserve.
• Completeness: information is complete within the limits of materiality and cost.

Comparability

Information is comparable when users can identify similarities and differences between it and information in other reports: between different entities and between the same entity over time. Users must therefore be told the policies used, the changes in them and the effects of the changes, and the statements must show corresponding figures for earlier periods.

Timeliness

Undue delay in reporting can destroy relevance. To report on time it may be necessary to report before all aspects of a transaction are known, which weakens reliability. Waiting until everything is known gives reliable but possibly useless information. The aim is a balance between relevance and reliability that best meets the decision needs of users.

Balance between cost and benefit

This is a pervasive constraint: the benefits of information should exceed the cost of providing it. The evaluation is largely a matter of judgement, and the costs do not always fall on the users who gain the benefits, so a strict test is hard to apply. But standard-setters, preparers and users should be aware of it.

Example: a detailed schedule costing ₦2m to prepare is worth including only if users gain more than ₦2m of value from it.

The ideas in more depth

Why materiality is not a characteristic

The characteristics are qualities that information should have. Materiality is instead the filter that decides whether an item needs to be shown at all. A tiny error in a large number does not change any decision, so it does not need correction; a tiny error that changes a conclusion does. That is why the test looks at both nature and size.

Why prudence is limited

Caution is a good instinct when estimates are uncertain, but unlimited caution becomes bias. An entity that understates its surplus in good years builds a reserve it can release in bad years, which lets it hide its true performance. The standard therefore allows caution in judgement, not deliberate understatement.

Why relevance and reliability pull against each other

Information that is fully verified arrives late; information that arrives on time is partly estimated. The best statements balance the two, with the decision needs of users as the test. That is why the standard names timeliness separately.

Sources and references

• International Public Sector Accounting Standard 1 and its appendix on qualitative characteristics; the conceptual framework for general purpose financial reporting.

These points are stated as at 5 November 2026.

Worked examples

1. Allowance.
   10 × 8% = ₦0.8m.
2. Net.
   10 − 0.8 = ₦9.2m.

1. Calculate.
   4 ÷ 900 = 0.44%, small by size; test the nature as well.

1. Calculate.
   500 × 5% = ₦25m as a working rule; the standard itself gives no percentage.

How to answer in the exam

• Name the characteristic, define it in one sentence and add a one-line example.
• Give the four principal ones first when asked for four.
• Link prudence and neutrality; link relevance and timeliness.
• For notes, list the identification items and the disclosures in order.

Common mistakes in the exam

• Listing materiality as a principal characteristic.
• Describing prudence as permission to understate profit.
• Confusing reliability with accuracy to the last naira.
• Defining comparability only across time.
• Naming a characteristic without explaining it.
• Leaving out the cost-benefit constraint.

Quick revision

• Principal four: understandability, relevance, reliability, comparability. Materiality is a threshold.
• Reliability: faithful representation, substance over form, neutrality, prudence, completeness.
• Constraints: timeliness and cost against benefit.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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