The Relationship Between Relevance and Reliability Accounting information provided by accounting entity must reach a certain quality standard, so that it can meet the users’ needs of accounting information. Financial accounting information quality has four basic characteristics, can be understandability relevance, reliability and comparability. Two of the greatest impacts on the accounting of the main accounting policies are relevance and reliability. When we compare and contrast any two subjects, the first and the most important thing is to make a clear scene of the two.
Only we analyzed the definitions of them, could we find the relationships between them. First of all, let us learn what exactly relevance is and what is reliability. Relevance, which known as one of the basic principles of financial accounting means accounting information refers to associated with the user’s economic decision-making. In another words, people can use accounting information to make some relative decisions. If the accounting information will affect the user’s decision-making by helping users assess past, present or future events, or correct the user’s evaluation of the past, we can say the information is relevant.
Relevant principles are intended to enhance the user’s abilities of decision-making and predictive. Relevant accounting information is considered an important quality characteristic in some countries. Generally speaking, whether a set of information is relevant, it will depend on its predictive value, feedback value and timeliness. If a message can help users predict the results of future events, then this information has predictive value, the user can predict the likely outcome, to make the best choice.
The predictive value of information could change the decision-making, so it is an important factor of relevance. If a message can make the user confirm or correct prediction of actual results over the past feedback to decision makers, compared with the expected results can be expected if the past is wrong, in order to avoid the industry to make the same mistake again when they make a decision. Shows the value of information feedback will help future decision-making. Therefore, it is also an important factor of relevance.
If any information wants to influence the decisions, it must be provided before decision-making. Although the timely provision of information will not be relevant sometimes, the information will not be effectiveness if it fail to provide in time.. As relevance, reliability also is an important quality characteristic. ”reliability was defined as the quality of information that assures that information is reasonably free from error or bias and faithfully represents what it purports to represent. ”(L. Johnson, 2005) This concept includes three aspects in real terms, verifiable, neutrality and authenticity.
First, reliability of accounting information should be different person measured on the same subject using the correct method of accounting to get the same conclusion. Thinking from another perspective, verifiable accounting information must be created based on the correct accounting method. In other words, the technology we used during the process of accounting can appropriately reflect the results of recording the economic and business transactions. Second, accounting information should be the information which generated in the neutral position.
It means accounting information was build during the process without any instigation or manipulated in any form, does not allow any distortion of accounting information for a particular purpose, in short, accounting information should be a fair reflection of what it is intended to reflect. Finally, the content of accounting information must be true. Real information should be objective in the comprehensive economic and business transactions, and reflect the result completely. Actual results could be a specific value generated under certain conditions, it can also be estimated on the data results of a range of data.
When the results can not be calculated, to calculate a relative range sometimes is more real than not accurately calculate the value of a specific value, because it is an objective reality. On the other hand, the real accounting information should be complete, without any artificially add or delete information. After we defined relevance and reliability, some relationship could be found. If the Information is useful to the users, it must be reliable. When there are no important errors or bias and it can be reflected accurately and can be the basis for the user, the information will have the reliability.
As we can see, the accounting information would be no value at all for users in decision-making without reliability. At the same time, the data must be associated with needs of users’ decision-making. When the accounting information will affect the user’s decision-making by helping users assess past, present or future events, or correct the user’s evaluation of the past, we can say the information has relevance. Similarly, the accounting information would be useless for users without relevance.
Accountants’ job is to provide a high degree of reliability and relevance accounting information to information users, who will make reasonable decisions, relies on accounting information. However, the fact is that it is quite difficult to achieve the reliability and relevance are balance, because of the conflicts between the two. The strengthening of relevance will lead to the weakened of the reliability, while improve the reliability will lead to the decreasing of relevance. If extremely reliable accounting information is not relevant or the most relevant information and not reliable, they are all are meaningless to the decision-making.
So information providers must consider the relevance, as well as the reliability. Because of the unification of two is difficult, the information providers provided can only have a certain degree of reliability, some have only a certain degree of relevance. In conclusion, keep the balance of relevance and reliability of accounting information is quite important and difficult. To keep the two into balance will satisfied the accounting information needs of users, so that the information will help the users make the correct decisions. Bibliography Todd, J, 2005, ‘Relevance and Reliability’, FASB Report, February 28, 2005