The physical count is a separate [or direct] verification of that output. For information to be judged relevant, an object to which it is relevant must always be understood: (a) Predictive Value And Feedback Value – To be relevant, information must have predictive value or feedback value or both. Investors and creditors can no longer be expected to tolerate blanket claims of differences in circumstances to justify undue use of alternative accounting procedures. … [Concepts Statement 2, paragraphs 84 and 85]. Reliability. That is quite different from the traditional meaning of conservatism in financial reporting, which usually connoted deliberate, consistent understatement of net assets and profits, summed up by the admonition to “anticipate no profits but anticipate all losses.”. … [Concepts Statement 2, paragraph 87]. A Hierarchy of Accounting Qualities The characteristics of information that make it a desirable commodity can be viewed as a hierarchy of qualities, with usefulness for decision making of most importance. “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement” [Concepts Statement 2, glossary]. Objective is a narrower term than verifiable. Popular usage of “material” often makes it a synonym for “relevant,” but the two are not synonymous in Concepts Statement 2. User-Specific Qualities. The exhibit shows two constraints, primarily quantitative rather than qualitative in nature. The better informed decision makers are, the less likely it is that any new information can add materially to what they already know. The FASB’s conceptual framework emphasizes that accounting is a representational discipline. Many accountants would like to have more quantitative guidelines or criteria for materiality laid down by the SEC, the FASB, or other regulatory agency. It means being independent of the observer, implying that objective accounting information is free of measurer bias—not affected by the hopes, fears, and other thoughts and feelings of the measurer—but saying little or nothing about measurement bias. It generally means only that no one can know the extent to which the measure has or does not have that representational quality. (c) Verifiability – Verifiability is “the ability through consensus among measurers to ensure that information represents what it purports to represent or that the chosen method of measurement has been used without error or bias” (Concepts Statement 2, glossary). The items in financial statements have a higher degree of reliability as quantitative representations of economic things and events in the real world—and therefore more usefulness to investors and other parties interested in an entity’s activities—if they faithfully represent what they purport to represent. (Faithful Representation), Requires that the item is depicted without bias either favorably or unfavorably to users. In recognition of the fact that materiality guidance is sometimes needed, the appendices to Concepts Statement 2 include a list of quantitative guidelines that have been applied both in the law and in the practice of accounting. a. Understandability. That definition of relevance is more explicit than the dictionary meaning of relevance as bearing on or relating to the matter in hand. To say that accounting information has predictive value is not to say that in itself it constitutes a prediction. Concepts Statement 2 examines the qualitative characteristics that make accounting information useful, and the FASB has gone to considerable effort to lay out what usefulness means. Hierarchy of Accounting Qualities. Representational faithfulness is adversely affected if information is intentionally biased to attain a predetermined result or induce a particular mode of behavior, a possibility that is discussed in the next section on neutrality. Information can make a difference to decisions by improving decision makers’ capacities to predict or by confirming or correcting their earlier expectations. That definition of relevance is more explicit than the dictionary meaning of relevance as bearing on or... B. Where the threshold for recognition occurs with regard to a materiality decision is a matter of judgment. How to Add Automation In a Month-end Closing Process, Basic Accounting: Assumptions, Principles, Constraints. Without usefulness, there would be no benefits from information to set against its costs. Perfect information is as beyond the reach of accountants as it is of non-accountants. (b) Completeness – Completeness of information is an important aspect of representational faithfulness, and thus of reliability, because if financial statements are to faithfully represent an enterprise’s financial position and changes in financial position, none of the significant financial functions of the enterprise or its relationships can be lost or distorted.
2020 hierarchy of accounting qualities