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SFAC #2 Summary Purpose of SFAC #2 to examine the characteristics that make accounting information useful. usefulness must be evaluated in relation to the purposes to be served optimal information for one user will not be optimal for another. Decision Usefulness hierarchy of qualities, with usefulness for decision making of most important Without usefulness, there would be no benefits from information to set against its costs while it does distinguish between primary and other qualities, it does not assign priorities among qualities. Understandability governed by a combination of user characteristics and characteristics inherent in the information Shown in hierarchy as a link between the characteristics of users (decision makers) and decision-specific qualities of information. Relevance information must be capable of making a difference in a decision predictions about the outcomes of past, present, and future events confirm or correct expectations. Information may confirm expectations or it may change them Components of Relevance Feedback Value – The quality of information that enables users to confirm or correct prior expectations. Predictive Value – The quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events. Knowledge about the outcome of actions already taken will generally improve decision makers' abilities to predict Timeliness – Having information available to a decision maker before it loses its capacity to influence decisions. Reliability Faithfulness, coupled with an assurance for the user, which comes through verification Representational Faithfulness – Correspondence or agreement between a measure or description and the phenomenon that it purports to represent – a.k.a. validity – Degrees of Representational Faithfulness Reliability does not imply certainty or precision. More Components of Reliability Lack of bias – Bias is the tendency of a measure to fall more often on one side than the other of what it represents instead of being equally likely to fall on either side. – Measurement method may be biased – Measurer, through lack of skill or lack of integrity, or both, may misapply the measurement method chosen Completeness Also part of reliability Completeness – The inclusion in reported information of everything material that is necessary for faithful representation Relevance of information is adversely affected if a relevant piece of information is omitted, even if the omission does not falsify what is shown. Verifiability The ability through consensus among measurers to ensure that information represents what it purports to represent more successful in minimizing measurer bias than measurement bias Verification implies consensus. Some accounting measurements are more easily verified than others. measurement or allocation methods are often verifiable even if the measures they produce result in a very low degree of representational faithfulness. Neutrality Absence in reported information of bias intended to attain a predetermined result or to induce a particular mode of behavior. Neutrality means that either in formulating or implementing standards, the primary concern should be the relevance and reliability of the information that results, not the effect that the new rule may have on a particular interest. Reliability and Relevance often impinge on each other. Whether there is a net gain to users of the information obviously depends on the relative weights attached to relevance and reliability Conservatism – A prudent reaction to uncertainty to try to ensure that uncertainty and risks inherent in business situations are adequately considered. – Historically, managers, investors, and accountants have generally preferred that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets. – introduces a bias into financial reporting, – should no longer connote deliberate, consistent – understatement of net assets and profits. Comparability gains greatly in usefulness if it can be compared with similar information about other enterprises difficulty in making financial comparisons among enterprises because of different accounting methods has been the principal reason for the development of GAAS. Purpose of comparison is to detect and explain similarities and differences. Consistency Applying accounting methods over a span of time Auditors must specify if that’s not the case If pushed too far, can inhibit accounting progress. Materiality continually confront the need to make judgments about materiality. Materiality judgments are primarily quantitative in nature Pervasive nature of materiality makes it difficult to consider the concept except as it relates to the other qualitative characteristics More important a judgment item is, the finer the screen should be Costs and Benefits Accounting information must attain some minimum level of relevance and also some minimum level of reliability if it is to be useful Unless the benefits to be derived from a commodity or service exceed the costs associated with it, it will not be sought after. Finis!
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