Reliability and Relevance by wLF1HSz

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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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