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Understandability Transactions and events must be accounted for and presented in the

nancial statements in a manner that is easily understandable by a user

who possesses a reasonable level of knowledge of the business, economic

activities and accounting in general provided that such a user is willing tostudy the information with reasonable diligence.

Understandability of the information contained in nancial statements is

essential for its relevance to the users. If the accounting treatments

involved and the associated disclosures and presentational aspects are

too complex for a user to understand despite having adequate knowledge

of the entity and accountancy in general, then this would undermine the

reliability of the whole nancial statements because users will be forced to

base their economic decisions on undependable information.

Example:

ne of the main problems with the nancial statements of !"#" was

that it contained a very complicated structure of special purpose entities

that were presented in a manner that concealed the nancial risk

exposure of the company. The accounting treatments of !"#" were not

comprehensible by the capital market participants who consistently

overvalued its worth until the inevitable collapse of its share price in $%%&

upon the news of its bankruptcy.

Faithful RepresentationInformation presented in the nancial statements should faithfully

represent the transaction and events that occur during a period.

'aithfull representation requires that transactions and events should be

accounted for in a manner that represent their true economic substance

rather than the mere legal form. This concept is known as (ubstance ver

'orm.

Substance over form  requires that if substance of transaction di)ers

from its legal form than such transaction should be accounted for in

accordance with its substance and economic reality.

 The rationale behind this is that nancial information contained in the

nancial statements should represent the business essence of 

transactions and events not merely their legal aspects in order to present

a true and fair view.

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Timeliness of Accounting Information

Timeliness  principle in accounting refers to the need for accounting

information to be presented to the users in time to fulll their decision

making needs.

 Timeliness of accounting information is highly desirable since information

that is presented timely is generally more relevant to users while

conversely, delay in provision of information tends to render it less

relevant to the decision making needs of the users.