IntroductionInternational conceptual framework treats reliability and relevance as the main characteristics of accounting information where useful decisions are made from. The joint project by Financial Accounting Standards boards (FASB) and International Accounting Standards Board (IASB) revisited a conceptual framework that started in October 2004. The FASB’s draft of exposure, “Fair value measurements” of June 2004, has sparked debates on trade-offs between relevance and reliability with respect to fair value versus historical cost. The use of fair values has become increasingly common in the recent past, although the current accounting standards rely mainly on the use of historical costs.
This has, therefore, resulted in the issue of AASB 13 Fair Value Measurement as a solution to the many questions that arise. Despite the long debate on fair value versus historical cost, there is still no convincing theoretical argument that allows one to settle on one method over the other. For that reason, this paper seeks to provide an alternative analysis of the links between relevance and reliability as it looks deeper into the new aspects of AASB standards. DiscussionTheoretical principles and accounting rules of financial reporting practicesA conceptual framework for financial accounting establishes the concepts underlying financial accounting.
It starts with objectives that identify the accounting aims and purpose, then the qualitative characteristics that make accounting inflation useful, and finally, the constraints of financial reporting. The goals of financial reports are many. First, they present information that is of use to everyone who has a logical understanding of both businesses and economic activities, and those who are making investments and credit decisions. Secondly, it gives information to current and potential investors, creditors and other users, which assist them to evaluate the quantity, timing and vagueness of future cash influx.
Finally, it provides information on economic resources, the claims and changes to the resources. In a broader perspective, the goals start on a wide concern on data that is helpful to decisions made by both investors as well as creditors. It subsequently narrows on the creditors’ and investors’ interest, on how their investments or credit to business ventures will bring them returns. Finally, the objective focuses to the financial statements that provide useful information in the assessment of future cash flows to the business enterprises (Statement of Financial Accounting Concepts 1980). Fundamental conceptsPrimary qualities The first characteristic of accounting information is its relevancy.
Sloan (1999) states that relevance requires the perfect measurement of the underlying attribute (x) of an item (such as the current value of a fixed asset) would equate to accounting measurement (y), which is useful to investors. Users use relevant financial information to predict crucial outcome of the past, present and the future. Another aspect of relevance is making information accessible to those who make decision before its ability to affect decisions positively is deemed as void.
The second characteristic is reliability, which is essential for those who have neither the time nor the know-how to examine and evaluate the factual content of the presented information (Heffes 2005). Secondary qualitiesThere are two secondary qualities, including comparability and consistency. Comparability of information allows users to recognize comparison and contrast among two sets of economic scenarios. Comparability combined with consistency enhances the effectiveness of financial reporting information in making decisions related to investment, credit and resource allocation (Heffes 2005).