What Is Meant by Saying That Accounting Information Should Be ‘Decision Useful'?

Topics: Debt, Economics, Balance sheet Pages: 3 (821 words) Published: August 8, 2007
"The Framework states that the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions." What is meant by saying that accounting information should be ‘decision useful'?

As stated in the AASB Framework, financial statements play an utmost important role to a variety of users, which mainly consist of the investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies, as well as the public, in making vital financial decisions. For accounting information to be ‘decision useful' to this groups of people, the financial information selected has to fulfill the qualitative characteristics of relevance and reliability, while the subsequent presentation of the financial information should be both understandable and comparable (Henderson et al., 2006). The basic attributes of what quantifies the information as useful is illustrated in Figure 1: Qualitative Characteristics of Financial Reporting.

While the financial statements are made up of the same information, it is being viewed and utilized in different ways by the different groups of users. For one, investors and shareholders extract the necessary information from the financial statements to assess how much risk they might get involved in by placing their capital into an entity for investment purposes. As supported by Alijarde (1997), the information provided on its viability and performance is the most important to investors and creditors. In this case, of all the items presented in the financial information, the debt level and ability of entity to meet its obligation is the most relevant to this particular group (Alijarde, M., 1997). Relevant information selection is based on the criteria of how appropriate it is in helping them to "evaluate past, present or future events relating to an entity" –...
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