Financial information should possess a number of qualitative characteristics in order to meet the needs of users of financial statements. There are, however, a number of issues that surround the qualitative characteristics of financial information. The threshold quality of materiality is not easy to define and can be misunderstood. Similarly, the concept of prudence is not clear-cut and can conflict with neutrality. In addition, relevance and reliability can be conflicting targets and a trade-off needs to be made between the two. Required:
Write an essay that draws on the above arguments in relation to the concepts of materiality, prudence and neutrality, and relevance and reliability
In this assignment, I shall discuss 3 main parts and they are: Materiality and the difficulty in defining this concept
The concept of prudence and its conflict with neutrality
The conflict between relevance and reliability.
Most of the times, people find it difficult to understand the various accounting Concepts. In this coursework, I shall analyze these concepts and explain them. First of all I shall discuss the materiality concept. WHAT IS MATERIALITY?
Authoritative accounting bodies in the USA such as Financial Accounting Standard Board (FASB), Securities and Exchange Commission (SEC), General Accounting Office (GAO), American Institute of Certified Public Accountants (AICPA) and in the international arena, The International Accounting Standards Committee (IASC) have contributed to clarify the materiality concept. FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information (1980) defines materiality as follows: “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” (Para. 132). Also according to the ‘introduction to accounting and finance’ textbook by Geoff black in the second edition, ‘materiality refers to the significance of information contained within financial statements’. He also said that ‘it is considered significant if its inclusion could influence the economic decisions of the users’. Also if information is immaterial, then it does not need to be disclosed separately, or in any other way that gives it undue significance. An example is if a business’s communications budget consisted of $20000 paid for mobile phone usage and $30000 paid for other phone calls; this could be amalgamated as one total of $50000 without any effect on the value of the information to users. Information is also material if its omission or misstatement could influence the economic decisions of users taken on the basis of financial statements and also materiality depends on the size of an item or misstatement. It follows that information which is not material is not useful and is therefore beyond the threshold for inclusion in the financial statements. Materiality is a threshold quality according to ASB provides a cut-off point rather than being a primary qualitative characteristic that information must have if it is to be useful, and it needs to be considered before the other qualities of that information. If any information is not material, it does not need to be considered further. Also materiality an underlying quality of relevance according to IASB is a cut-off point in deciding whether information is important to users. The description and amount of an item may make it material. Hence information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or correcting their past evaluation. In many years the ideas of the UK ASB reflect those of the IASB which were written ten years earlier. However,...
References: Qualitative Characteristics of Accounting Information (1980) para 132.
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