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The Qualitative Characteristics of Relevance and Reliability - Essay Example

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The Qualitative Characteristics of Relevance and Reliability

IASB has set standards for financial reporting which ensure that the reporting is done according to the set principles by all the companies. This helps the users of financial statements in making crucial economic decisions as there is no ambiguity due to different accounting styles. The standards ensure that a company provides all the relevant information that influences the financial needs of the users. There are specific areas that are not allowed to be left untouched. There is a possibility that some users require non-financial information about a company which is not available in its financial statements. There are a variety of users and their requirements are also different. Financial statements may be used by the employees of a company to know about their chances of obtaining a bonus. A cash flow statement of the year describes the liquidity of the company. Comparisons of statements of affairs of a year with those of preceding years help in evaluating the performance of the company. ...
These are understandability, relevance, reliability and comparability (Para 24). Understandability and comparability can be discussed in the context of relevance and reliability as they cannot be separated from each other. According to Para 25, the information that is provided in the financial statements must be readily understandable by the users who have reasonable knowledge of business, accounting and economic activities and a willingness to study the financial statements. If the information is not understandable, it might not be reliable for the users because they would be reluctant to take decisions on the basis of such information. However, some information of complex nature has to be included in the financial statements to ensure that relevant information is available. Such information cannot be discarded merely due to the fact that it is difficult to understand. Para 26 of the Framework explains that information is relevant when it influences the economic decisions of users by helping them in evaluating past, present or future events (predictive role) or by confirming, or correcting, their past evaluations (confirmatory role). The predictive and confirmatory roles of information are interrelated. For instance, a user may take a decision on the basis of information regarding the current level and structure of asset holdings of a company. Here, this information would have predictive role. But the similar information might also prove to be the confirmation of previous predictions made by the similar or different users (Para 27). The predictive ability of information does not mean that it gives clear forecasts; it gives relevant and reliable information so that the ...Show more

Summary

Relevance and Reliability Your Name Due Date List of Contents Introduction………………………………………………………3 Theory…………………………………………………………….4 Practice……………………………………………………………8 The Application of Theory to Practice…………………………….11 Recommendations………………………………………………14 References……………………………………………………….17 Introduction Financial reporting is a legal requirement of a company…
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