Question

2.1 Relevance versus Representational Faithfulness. ‘‘Some asset valua- tions using historical costs are highly relevant and very representationally faithful, whereas others may be representationally faithful but lack relevance. Some asset valuations based on fair values are highly relevant and very representational faithful, whereas others may be relevant but lack representational faithfulness.’’ Explain and provide examples of each.

Answer 1

Reliability as an attribute of accounting information relates to the degree of authenticity of the reported amounts; all the reported amounts are supported by appropriate credentials and evidences. Suppose, if the assets are reported at the acquisition cost, will not be more reliable for the management if the assets are reported at the current market price. Relevance is another attribute of accounting information which is timely and has the capacity to affect a user’s decisions based on the information; relevant asset valuations incorporate all available information, including the acquisition cost and subsequent developments. Examples: Historical cost (reliable and relevant): accounts receivable, fixed assets with values that remain relatively constant. Historical cost (reliable but less relevant): acquired research and development and other intangible assets, and real estate that have appreciated values. Fair value (relevant and reliable): Marketable equity securities, commodities. Fair value (relevant but less reliable): Real estate valuations based on comparable analysis, internally generated intangible asset valuations.