Representational Faithfulness High quality financial statements should reflect the real economics of the transaction being reported. In the U.S., we refer to this concept as representational faithfulness. A map's representational faithfulness may be determined by how well the map describes the coastline. In the same way, a financial statement's representational faithfulness may be evaluated by how well it represents the economic resources and obligations of the company, and by how well the transactions and events that change those resources and obligations are described. For example, suppose that a company reflects future costs in its income statement by setting up reserves in a profitable year and then reducing those reserves in a bad year when the costs are actually incurred.
Investors are unable to see the real economic results of the business.
Accounting standards that permit this practice lack high quality because they don't exhibit representational faithfulness. Verifiability Verifiability means the degree to which different people, when asked to measure something using the same approach, arrive at the same amount. Cash held by a company will possess a high degree of verifiability if several people can count the cash and arrive at the same amount. Neutrality Information should be free from bias towards a predetermined result. This quality is referred to as neutrality.