What is Relevance in Accounting?
It is the concept which means that information which is generated by the accounting system should be able to be utilized for various decisions making by the person who is viewing that information. It should be valuable to the end users. End users are defined as internal and external stakeholders.
It is associated with the use of various types of necessary information in accounting like the financial reporting for the various decision-making processes.
The next question comes what sort of information is relevant. The kind of information that can alter the decision-making is critical and can be called as accounting relevance.
For example, a small amount of money lost in some daily company expenditures is not valuable information. It is rather irrelevant and doesn’t come under the definition of accounting relevance.
However, if the company suffered a major disaster such as an earthquake and half of its building has collapsed, so it comes with the relevant information. This following information must be included in all the financial statements as it may alter the decision of an investor about his plans for investing or not.
There are three four characteristics of financial information to consider under the domain of accounting relevance. The predictive value, the feedback, and timeliness.
A financial statement regarding accounting significance should have predictive value. The information should be valuable enough to make some predictions or anticipations about future events.
Many analysts use the past financial statements to estimate the future performance of that company regarding productivity and profitability.
It should be accurate information. Any false information may lead to deceptive estimates. Therefore any false or manipulated information doesn’t come under the definition of accounting relevance. Such information is not of any beneficial use.
Every useful piece of information has the quality of it getting the required feedback. For example, inadequate financial statements in the past may help to discover the reasons behind it.
Many improvements or alterations in courses can be taken to improve the future outcomes. So in this way, the feedback becomes essential. Each valuable set of information has a feedback system attached to it.
It is also an essential aspect. Every set of useful or relevant information has a correct time and date correlation with it. Wrong dates or time on any set of information may render it completely useless. Financial statements must have this property of timeliness to let the investors and creditors alter their courses of decisions.
An example of Relevance Accounting 1:
A company tells the information regarding the increase in earnings per share from $4 to $6 in comparison to the last year data.
It is a valuable set of information as upon this piece of information May decisions shall be taken. Investors may utilize this information regarding the profits they are expected to receive on their investments. Many new people may think about investing in the company.
An Example of Relevance Accounting 2:
An investor has net assets of $10 million in a company.
It is a useless piece of information as it is giving no value set to alter the course or help in decision making.
However, if the statement goes like: An investor has total assets of $10 million in a company with a net profit of $40,000 per year.
Now this information has become valuable. It now helps in estimating the position of the enterprise. It may be valuable for investors to consider before buying shares in that company.
In short, accounting relevance should contain authentic and orderly information that has a predictive and confirmatory value. It should be properly timed and has a feedback value.