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To what extent is the search for relevance in financial information hampered by the need for reliability?

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Introduction

To what extent is the search for relevance in financial information hampered by the need for reliability? Shortly after its formation in 1973, The International Accounting Standards Committee (henceforth referred to as IASC) conferred to introduce a conceptual framework that outlines basic concepts and assumptions, which must all be considered to order to produce financial information. The essential purpose of framework being to provide a 'fair presentation' of the state of affairs of certain businesses. What 'fair presentation' means exactly is not clear, but an assumption we can make about this is that the financial information must not be misleading to the users in any way. This framework can be read (in an adapted format) as follows: Here we are able to split this framework into three levels. With level A (fair presentation being the overall objective. This is thus supported by level B 'concepts' (relevance and reliability) and level C 'rules.' (Those, which underline the level B concepts) Within this exercise we wish to examine how the concepts and rules conflict each other in the pursuit for the fair presentation of financial information. ...read more.

Middle

What use is financial information that is relevant but unreliable, likewise information that is reliable but irrelevant. Timeliness versus Completeness The concept of timeliness states that the information provided by accountants is as up-to-date as possible. However, since it takes time to present reliable information it soon becomes rather 'out-of-date.' This conflict of ideas is becoming more and more prominent since companies are becoming increasingly demanding regarding the frequency of their external reporting. Understandability "In a complex world, information may have to be complex in language in order to achieve fair presentation." IAS 1 allows the preparers to assume that the users are sufficiently intelligent to comprehend the information that is given to them so that it is useful to them. In the real world however, this is not always the case and, given the amount of specialist language within the accounting sphere, users may be phased by the complexity and may not interpret certain elements correctly thus leading to a certain amount if unreliability. Materiality " This implies that insignificant items should not be given the same emphasis as significant items. ...read more.

Conclusion

Now we must consider which is the more relevant of these two ideas to adopt, as a majority factor. This can all be reduced to a question of risk and thus a choice in the policy that a company wishes to adopt for the future. For example if one were to be conservative and choose reliability then its true that the business would continue to operate with stability but, by definition, gives little room for large changes (in either direction) in economic activity. Whereas if the users were to be partial towards relevance then the company may experience greater change in activity due to the increased relevance, however given the element of sacrificed reliability, this change may lead to a reduction in turnover/profit. Respectively prudence and neutrality behave in a similar way with respect to the risk involved. Based on the assumption that no owner wants to be based at either of these extremes, most companies would therefore search for an appropriate compromise between the two ideas; a compromise that allows us to achieve a set of published financial statements that perhaps reflects the desired amount of risk to be taken by the user of accounts. Final Word Count: 902 words. ...read more.

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