Objectives in Selecting Accounting Policies standards

Objectives in Selecting Accounting Policies standards

The quality of information contained in financial statements determines the usefulness of these statements. This quality of information can be measured in terms of four factors – relevance, reliability, comparability and understandability.

Relevance

Financial statements should be prepared to meet the objectives of the users. Relevant information which can satisfy the needs of most users is selected and recorded in the financial statement. These financial statements can be used as the basis for financial decisions. This means that it can be used to confirm, or correct, prior expectations about past events and also to help forming, revising or conforming expectations about the future.

Reliability

The information is free from material error and bias. The information provided in financial statements can be reliable if it is:

• Capable of being depended upon by users as being a true representation of the underlying transactions and events which it is representing
• Capable of being independently verified 
• Free from bias 
• Free from significant errors 
• Prepared with suitable caution being applied to any judgements and estimates which are necessary. 

Comparability

The information enables comparisons over time to identify and evaluate trends. The information contained in financial statements can be useful if it can be compared with similar information about the same business for another accounting period or at another point in time. It is also useful to be able to compare the information with similar information about other business.

In order to make comparisons, it is necessary to be aware of any different policies used in the preparation of the financial statements, any changes in these policies and the effects of such changes. It is important to be able to identify similarities and differences between the information in the financial statement and the information relating to other accounting periods or other businesses.

Understandability

It is important that financial statements can be understood by the users of those statements. This depends partly on the clarity of the information provided.

It also depends on the abilities of the users of the financial statements. It is normally assumed that users of financial statements have a reasonable knowledge of business and economic activities and accounting and that they will be reasonably diligent when studying the financial statements because it is decided that it is too difficult for users to understand.