Question Tag: Relevance

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 10 Marks

FR – April 2022 – L2 – Q5a – Conceptual Framework for Financial Reporting

Justify how qualitative characteristics of financial information apply to tangible non-current assets using examples.

The IASB’s Conceptual Framework identifies, among others, the qualitative characteristics of relevance, faithful representation, comparability, and understandability.

Required:
Justify with an example each how the qualitative characteristics will apply to the treatment of tangible non-current assets. (10 marks)

Qualitative characteristics as applicable to tangibles non-current assets illustrated by IAS 16
Relevance:
Example: Choosing the revaluation model for tangible non-current assets like property provides relevant information as it reflects the current market value, aiding users in decision-making based on up-to-date information. For instance, if a company chooses to revalue its land and buildings to their fair value, it provides information that is more relevant for users assessing the company’s financial position.

Faithful Representation:
Example: Using the cost model ensures faithful representation as it records assets based on historical cost, which is verifiable and objective. For example, if a company uses the cost model for its machinery, the value in the financial statements reflects the original purchase cost less accumulated depreciation, representing the actual cash spent.

Comparability:
Example: Adopting the same depreciation method for all tangible non-current assets within a class enhances comparability. For example, if a company uses the straight-line method to depreciate all its machinery, users can compare the performance of different years and other companies using the same method.

Understandability:
Example: Disclosing the depreciation method and rate for each class of assets in the financial statements improves understandability. For instance, explaining that buildings are depreciated over 20 years on a straight-line basis helps users understand the impact of depreciation on financial performance.
(10 marks)

  • 5 Marks

CR – May 2016 – L3 – Q4b – Accounting and reporting concepts

Discuss the concepts of relevance, faithful representation, and comparability, and how they make financial information useful to users of financial statements.

The qualitative characteristics of relevance, faithful representation and comparability identified in the IASB’s Framework for the preparation and presentation of financial statements (Framework) are some of the attributes that make financial information useful to the various users of financial statements.

Required: Discuss the concept of relevance, faithful representation and comparability and how they make financial information useful.

i) Relevance

Information has the quality of relevance when it can influence, on a timely basis, users’ economic decisions. It helps to evaluate past, present and future events by confirming or perhaps correcting past evaluations of economic events. There are many ways of interpreting and applying the concept of relevance, for example, only material information is considered relevant as, by definition, information is material only if its omission or misstatement could influence users. Another common debate regarding relevance is whether current value information is more relevant than that based on historical cost. An interesting emphasis placed on relevance within the Framework is that relevant information assists in the predictive ability of financial statements.

That is not to say the financial statements should be predictive in the sense of forecasts, but that (past) information should be presented in a manner that assists users to assess an entity’s ability to take advantage of opportunities and react to adverse situations. A good example of this is the separate presentation of discontinued operations in the income statement. From this users will be better able to assess the parts of the entity that will produce future profits (continuing operations) and users can judge the merits of the discontinuation ie has the entity sold a profitable part of the business (which would lead users to question why), or has the entity acted to curtail the adverse effect of a loss making operation.

(ii) Faithful representation

The Framework states that for information to be useful it must be reliable. The quality of reliability is described as being free from material error (accurate) and a faithful representation of that which it purports to portray (i.e. the financial statements are a faithful representation of the entity’s underlying transactions). There can be occasions where the legal form of a transaction can be engineered to disguise the economic reality of the transaction. A cornerstone of faithful representation is that transactions must be accounted for according to their substance (i.e. commercial intent or economic reality) rather than their legal or contrived form. To represent faithfully, information must be neutral (free from bias). Biased information attempts to influence users (perhaps to come to a predetermined decision) by the manner in which it is presented. It is recognized that financial statements cannot be absolutely accurate due to inevitable uncertainties surrounding their preparation. A typical example would be estimating the useful economic lives of non-current assets. This is addressed by the use of prudence which is the exercise of a degree of caution in matters of uncertainty. However prudence cannot be used to deliberately understate profit or create excessive provisions (this would break the neutrality principle). Reliable information must also be complete, omitted information (that should be reported) will obviously mislead users.

(iii) Comparability

Comparability is fundamental to assessing an entity’s performance. Users will compare an entity’s results over time and also with other similar entities. This is the principal reason why financial statements contain corresponding amounts for previous period(s). Comparability is enhanced by the use (and disclosure) of consistent accounting policies such that users can confirm that comparative information (for calculating trends) is comparable and the disclosure of accounting policies at least informs users if different entities use different policies. That said, comparability should not stand in the way of improved accounting practices (usually through new Standards); it is recognized that there are occasions where it is necessary to adopt new accounting policies if they would enhance relevance and reliability.

  • 5 Marks

CR – Nov 2016 – L3 – Q5d – Regulatory framework and ethics

Explain two constraints on relevance and faithful representation of financial statements.

Two key constraints on relevance and faithful representation in financial statements are:

  1. Timeliness:
    • Information must be provided in a timely manner to be useful. However, if there is a delay in reporting, the relevance of the information diminishes. To achieve timeliness, financial statements may need to be prepared before all details of a transaction or event are fully known, which can impair faithful representation. Hence, there is often a trade-off between timeliness and accuracy.
  2. Cost vs. Benefit:
    • There is a balance between the cost of providing financial information and the benefit derived from it. In some cases, the cost of collecting and reporting detailed information may outweigh the benefits to users. This constraint limits how much detail can be provided, potentially affecting both the relevance and faithfulness of the representation of financial data.

Two key constraints on relevance and faithful representation in financial statements are:

  1. Timeliness:
    • Information must be provided in a timely manner to be useful. However, if there is a delay in reporting, the relevance of the information diminishes. To achieve timeliness, financial statements may need to be prepared before all details of a transaction or event are fully known, which can impair faithful representation. Hence, there is often a trade-off between timeliness and accuracy.
  2. Cost vs. Benefit:
    • There is a balance between the cost of providing financial information and the benefit derived from it. In some cases, the cost of collecting and reporting detailed information may outweigh the benefits to users. This constraint limits how much detail can be provided, potentially affecting both the relevance and faithfulness of the representation of financial data.
  • 10 Marks

FA – Nov 2023 – L1 – Q1a – The IASB’s Conceptual Framework

Explain the key qualitative characteristics of useful accounting information according to the IASB's Conceptual Framework.

Explain each of the following characteristics of useful accounting information:
i) Relevance (2 marks)
ii) Understandability (2 marks)
iii) Materiality (2 marks)
iv) Completeness (2 marks)
v) Neutrality (2 marks)

i) Relevance:
This is defined as capable of making a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. Predictive value consists of the capability of being used as an input in processes or models used to predict future outcomes. Confirmatory value exists when the information provides feedback about earlier estimations. The relevance of information depends on its materiality since only material information is considered relevant.

ii) Understandability:
An essential quality of the information provided in financial reports is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting. Classifying, characterizing, and presenting information clearly and concisely makes it understandable.

iii) Materiality:
Information is material if omitting or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity’s financial report. For example, a large supermarket omitting expenses of GHȼ1,500 would not be material to them but would be to a small local shop.

iv) Completeness:
Completeness means that the depiction will include all the information, including descriptions and explanations, necessary for a user to understand the phenomenon. Omission of any information can lead to unreliability. Therefore, the more complete the information the better, but weigh against the costs of time and money needed to prepare full information. For example, if the omission of a particular asset would lead to incomplete and therefore unreliable information, the effect of having unreliable information must be weighed against the costs and time involved in the inclusion of the asset.

v) Neutrality:
Neutrality is obtained when a depiction is without bias in the selection or presentation of financial information. In other words, it is not manipulated in order to present a favorable or unfavorable depiction of an economic phenomenon. Financial statements are not neutral if a particular selection or presentation of information influences the user’s decision. Competent individuals working independently should arrive at the same or very similar measures of given economic events or situations. For example, a provision for bad debts must be based on some evidence and not the biased view of the preparer of the financial statements.

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope