The relevance of information is affected by its materiality. Materiality illustrates an item’s influence on an entity’s whole financial condition and operations. An item is material when it has a significant role on reasonable investor or creditor making decisions. On the other hand, it is immaterial when its inclusion or omission has no effect on decision maker and then the information not be separately disclosed in general-purpose financial report. For the purpose of determining the materiality of an amount, the accountant always compares it with other items as total assets, total liabilities or net profit. (Jerry et al. 2006)
Donald, Jerry and Terry (2007) regard “Accounting information is reliable to the extent that it is verifiable, is a faithful representation, and is reasonably free of error and bias.” Owning to so many users don’s have time and special skills to assess the really content of the information, and then the decision makers treat reliability as necessity. To begin with, verifiability results independent measurers achieve same outcomes when they using the same methods. In other words, it means we must be able to prove that it is free of error and bias. Furthermore, representational faithfulness predicates the figures and characterizations should suit what really presented or happened. For instance, if Red Apple Furniture’s income statement reports sales of $125 million when it had sales of $98 million, then the statement is not a faithful representation. Moreover, reliable accounting information need transactions to be accounted for and presented in a manner consistent with their economic substance. It may be have a difference between economic substance of transaction and its legal substance. For example, some types of equipment leases are to be coped with in the accounting records as if the entity had bought the items rather than acquiring them under a lease. Eventually, neutrality means accounting information concerning to an entity cannot be selected, prepared or presented to favorite one set of interested parties over another and unbiased information must be of significance consideration. To be reliable, prudence should also be exercises. According to Hoggett, Edwards and Medlin (2007) “The concept is explained in terms of a desire to exercise care and caution when dealing with uncertainties in the measurement process.”
The relationship between Relevance and Reliability
The primary decision-specific qualities are relevance and reliability. Both are critical and useful. Accounting information is relevant when it affects investors’ resolutions concerning to the distribution of rare resources. No matter how reliable, if information is irrelevant to the decision at hand, it is useless. Information is reliable when the information can be depended on to represent faithfully, without reasonably bias and error, the transactions it is supposed to represent. Inversely, relevant information has little value when it cannot be relied on. (Bazley et al 1999)
Accounting Information concerning to a company is much more useful if decision makers can compare it with same information with regard to other companies. Comparability occurs when dissimilar entities employ the similar manner. For example, Dick Smith, Nike Sport and the Colorado Group all utilize the cost principle in reporting PPE assets on the balance sheet. Moreover, each company determines its net profit by using the income recognition principle. In order to implement comparability, financial information should become consistent. Consistency means that an entity carries on the similar accounting treatment to same events, from year to year; the company shows consistent use of accounting standards. For example, Body Shop selects Weighted Average as the inventory process costing method in the first year of operation; it is expected to use Weighted Average in following years.
According to Donald, Jerry and Terry (2007) “Understandability means that users must understand the information within the context of the decision being made.” There includes a significant demand for users of those to be able to understand their meaning, when the information is contained in general financial reports. Understandability, however, this does not necessarily mean easy. The report assumes the readers have a reasonable knowledge of business and economic activities and accounting, and that they are willing to learn the information with reasonable diligence. The framework makes it clear that information is still on the complex issues should be considered relevant to the decision-making needs of users, even if it is too difficult for some users to understand. If users find that the information is too complex for them to comprehend, it is expected that they will to find professions to seek assistance and suggestion.
Jerry et al. (2006) states “Constraints on the accounting process mean that relevant and reliable information may not be provided. The constraints discussed in the Framework include timeliness, benefit and costs, and the balance between qualitative characteristics.” Initially assumed the timeliness of the information must be available before it for decision-makers lose its influence decision-making capacity. In other words, it is ordered and timely information on national principles, its meaning will not be lost. Another provision of information restrictions that useful for decision making, because the benefits derived from information should exceed the cost of providing information. Finally, the balance between the quality characteristics, which means there may be trade and the quality characteristics of closed, leaving the framework of the producers of information in order to balance the criteria, so that useful information to convey to the user.
- Financial Accounting Standard Board, Qualitative Characteristics of Accounting Information, Stamford Conn. May 1980
- John Hoggett, Lew Edwards, John Medlin, Matthew Tilling, 2008, Financial Accounting, 7th Edition, John Wiley & Sons Australia, Ltd
- Bazley, Hancock, Berry, Jarvis, 1999, Contemporary Accounting: a conceptual approach, 3rd Edition, Nelson ITP, Melbourne.
- Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, 2007, Intermediate Accounting, 12th Edition, John Wiley & Sons Australia, Ltd
- Jerry J. Weygandt, Keryn Chalmers, Lorena Mitrione, Susana Lai-Mei Yuen, Michelle Fyfe, 2006, Principles of Accounting, John Wiley & Sons Australia, Ltd