Accounting relevance deals with the usefulness of financial information to users during the decision making process. Obviously financial information that isn’t related to users decisions isn’t useful to creditors or investors. That is why FASB committed to making financial reporting relevant to the end users.
FASB asked the question, “Will financial statement users’ decisions be affected by this information?” If the answer is no, then the information isn’t relevant and can be excluded from the financial statements. A small abnormal expense is a good example of irrelevant accounting information. If the company suffers a small causality loss because someone threw a brick through the factory-building window, an investor will still invest in the company. This is irrelevant information because it doesn’t affect the end user.
However, the company suffering a causality loss because the factory burned down to the ground is a relevant piece of accounting information. This information must be included in the financial statements because investors or lenders’ decisions might be affected by this information.
Examples
FASB also identified three main characteristics of relevant accounting information: predictive value, feedback, and timeliness. Financial information must have all of these characteristics in order to be considered relevant.
Predictive Value
Predictive value refers to the fact that quality financial information can be used to base predictions, forecasts, and projections on. Financial annalists and investors can use past financial statements to chart performance trends and make predictions about future performance and profitability.
Feedback Value
Quality information has a feedback value when it can confirm or correct previous expectations. In other words, users can examine financial information and confirm or adjust their predictions made on previous performance trends. Based on this feedback, users can make future decisions.
Timeliness
Timeliness is one of the most important factors in relevant information. Out of date information does not do investors or creditors any good when they are trying to make current and future decisions. Financial reporting must be timely and current in order to be used by investors and creditors.
