Memorandum Essay

1594 words - 6 pages

Date: 4-11-09Re: Case 3-5A.Discuss the concept of relevance. In your opinion, would the amounts reported by U.S. companies for property, plant, and equipment be more or less relevant than the current cost amounts reported by companies in England, Mexico, or elsewhere?RelevanceInformation is relevant when it influences the economic decisions of users by helping them evaluate past, present, and future or by confirming or correcting their past evaluations. Relevance is also affected by materiality. Information has the quality of relevance when it is 'capable of making a difference in the economic decisions of users by helping them evaluate the effect of past and present events on future net cash inflows (predictive value) or confirm or correct previous evaluations(confirmatory value), even if it is not being used' (FASB, 2005: 2; FASB 1980: 37). In the IASB framework information has the quality of relevance 'when it influences the economic decisions of users by helping them evaluate past, present of future events or confirming, or correcting, their past evaluations' (IASB, 1989: 24). Both frameworks thus say that accounting information is relevant if it has the capacity to make a difference in a decision. The FASB requires information to be capable of making a difference in the economic decisions of users 'even if it is not being used'. However, to be relevant the IASB definition additionally requires that information is used i.e. influences the decision maker in making economic decisions. Another small difference between the FASB and IASB framework is the FASB framework explicitly mentions that relevant information has to have predictive and feedback value, while the IASB uses these terms implicit in its framework. 'The predictive and confirmatory roles of information are interrelated (IASB,1989: 27).First, the FASB framework defines timeliness an ancillary aspect of relevance.Information must be available when users need it. Although timeless alone cannot make information relevant to users, a lack of timeliness may cause a loss of relevance of information reported or even make it irrelevant (FASB, 1980: 56; IASB, 1980: 43).Although the assumptions of the IASB are equal to the assumptions of the FASB, the IASB does not define timeliness as a component of relevance but as a constraint on relevant and reliable information. If the financial statement is published earlier, the relevance of the financial report increases. In the new framework timeliness is expected to be an ancillary aspect of relevance.Second, the IASB framework defines materiality as an attribute of relevance, while in the FASB hierarchy materiality is situated as threshold for recognition. 'Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements' (IASB, 1989: 30).However, the materiality criterion may not only affect the relevance of information, it may also have effect on other qualitative...

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