Relevance: When preparing financial statements we must take into account a few simple considerations. We need to know for who to information is intended, what they do and what they need for the future. Relevance also relates to the actual credibility and usefulness of financial information and the provision of predictions of future economic happenings. To do this one must use the past and the present as a base because here we can understand how other situations have hitherto affected the business so as to fully benefit from advantageous situations and to protect itself in more difficult periods
Reliability: Relating to the dependency of the provided financial information. This concept is undertaken to prevent the release of information, which may be detrimental to the business entity in the future.
We immediately realise that some sort of compromise has to be reached in order to achieve the level A objective. 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 However, since it takes time to present reliable information it soon becomes rather ‘out-of-date.’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. Te insignificant items are, by definition, unlikely to influence decisions or provide useful information to decision makers, but they well cause complications to the user of accounts.” This thus allows yet more subjectivity to creep into the accounting process. Complete disclosure of all items in financial information may lead to complete reliability but will lead to much irrelevancy and confusion.
We have noted some conflicts that exist between relevance and reliability. It is necessary in addition to statement a major conflict within the scope of reliability, this being the conflict between neutrality and prudence. Neutrality states freedom from any form bias whereas the idea of prudence requires us to bias information so as not to overstate profits, turnover, assets etc. In essence this is simply the prevention of creating the picture of the business looking too healthy. We must immediately concede that a certain amount of either has to exist in the final accounts, because a total presence of one element will mislead to user and this is the ‘cardinal sin’ that can be committed amongst financial reporters. 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.
Bibliography:
Financial Accounting: An international introduction.
David Alexander & Christopher Nobes
Prentice Hall 2001.
Financial Accounting:
Chris Britton & Chris Waterston
Longman Modular Texts 1996.
Huw Griffiths
0536522:
Basic Accounting A
“To what extent is the need for relevance in financial information hampered by the need for reliability?”
