Question

Scenario:

Accounting information provides useful information about business transactions. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among characteristics of useful information.

Task:

In the discussion, explain both characteristics, and give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other:

1. Relevance and consistency.

Answer 1

(1) Relevance is one of the two primary decision-specific characteristics of useful accounting information. Relevant information is capable of making a difference in a decision. Relevant information helps users to make predictions about the outcomes of past, present, and future events, or to confirm or correct prior expectations. Information must also be timely in order to be considered relevant. Relevance is the concept that the information generated by an accounting system should impact the decision-making of someone perusing the information. The concept can involve the content of the information and/or its timeliness, both of which can impact decision making. In particular, information that is provided to users more quickly is considered to have an increased level of relevance.

(2) Consistency means that unchanging policies and procedures have been used by an enterprise from one period to another. Consistency enhances comparisons between information about the same enterprise at two different points in time. The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods. Only change an accounting principle or method if the new version in some way improves reported financial results.

Proposed new accounting methods may be more relevant to many decision makers than existing methods. However, if adopted, they would impair consistency and make trend comparisons of an enterprise’s results over time difficult or impossible. The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods. If for any valid reasons the accounting policy is changed, a business must disclose the nature of change, the reasons for the change and its effects on the items of financial statements.

Although trade-offs result in the sacrifice of some desirable quality of information, the overall result should be information that is more useful for decision making.