Understandability Concept
Factor of understandability means that factor which would
improve the understandability of user. Factor of understandability can be
explained in terms of easy language, disclosure & explanation, narration of
accounting policies, application of IAS.
Financial statement should allow the easy understanding of
the information presented in financial statement and there should be no
difficult faced by the user for understanding the financial statement. The
understandability can be achieved through the following.
1.
Use of Easy Language
First factor of
understandability is easy language. It means financial statement must use easy
language in the financial statement. Easy language is a relative terms, but
management should keep in mind that a person with reasonable knowledge of
accounting and economic should be able to understand the financial statement.
2.
Appropriate Disclosures &
Explanation:
Second factor of
understandability is appropriate disclosure & Explanation. It means financial
statement understandability can be improved with the help of disclosure and
explanation. The importance of disclosure & Explanation is more relevant in
case of complex transaction.
3.
Narration of Accounting Policies
Third factor of
understandability is narration of accounting policies. A comprehensive
narration in this regard would help user of financial statement to understand
the figure in the financial statements. Management should present the all
important accounting policies in a comprehensive and concrete way.
4.
Application of IAS
Fourth
factor of understandability is Application of international accounting
standards by management in the preparation of financial statements. IAS are
designed keeping in view the user economic decision needs, and therefore an
important & effective tool for improving understandability
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