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Relevance and Reliability - Essay Example

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In the paper “Relevance and Reliability” gives recommendations regarding financial reporting as one of the most important needs of a company. It helps a company in the evaluation of its own performance and in pin-pointing the specific areas in which it should be working harder…

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Relevance and Reliability

IASB requires that the financial statements must have four qualitative characteristics namely understandability, relevance, reliability and comparability. The attribute of relevance requires that the information provided in the financial statements must be relevant to the needs of the users. Irrelevant information cannot influence the decision making of a user. Paragraph 26 of framework says that the predictive and confirmatory roles of information are interrelated. For instance, information about asset holding enables a user to predict an entity’s ability to capitalize on the opportunities and to cope with adverse situations. For users who had made such predictions in a preceding period, the same information would play a confirmatory role as an entity’s structure and the outcome of previous predictions would be evident. Users use the financial statements to make a lot of predictions and they can make that foresight effectively if the relevant information is disclosed properly. For example, some items of income or expense are not conventionally seen in financial statements as they are unusual. Proper and separate disclosure must be made for such items so that their relevance becomes significant.
For a piece of information to be reliable, it must be material. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of financial statements. In statistical terms, information is regarded as material if it is more than 5% of the total profits. ...
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