Definition of Relevance
Accounting is not just concerned with quantitative information. The Australian Accounting Standards Board (AASB) Conceptual Framework states the qualitative characteristics preparers of financial statements should take into consideration, one of which is relevance. Relevance is concerned with the ability of financial information to influence the economic decision on how to best allocate one’s scarce resources. (Australian Accounting Research Foundation 1990; International Accounting Standards Board 2006). Relevant information can provide useful explanation for economic phenomena, and that in turn influences the decisions that are made (Financial Accounting Standards Board 2006; International Accounting Standard Board 2006). It takes into account both the nature and magnitude of financial information, as both are capable of influencing financial decision making (Australian Accounting Research Foundation 1990).
Relevant information possesses predictive value as well as confirmatory value to users. Retrospectively, it should allow users to look at past information and evaluate or correct their decisions. The confirmatory value of information allows the user to identify the essential factors that need to be considered when making predictions and in time, increase the accuracy of prediction. (International Accounting Standards Board 2006). On the other hand, the predictive value of relevant information allows a prediction of the future outcome to be possible (International Accounting Standards Board 2006).
In the International Accounting Standards Board (2006) discussion paper, the qualitative characteristic of timeliness was included as a part of relevance. This is a sensible argument, as financial information is time sensitive a ...