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Understandability is the quality of information that enables users to comprehend its meaning. Understandability is enhanced when information is classified, characterized and presented clearly and concisely. Comparability can also enhance understandability.

There are many different users and decisions makers. The level of accounting and business knowledge they possess, the methods of decision making they employ, the ability to process the information, the information they already possess and their ability to obtain additional information differ among various decision makers. It is assumed that users of financial statement have a reasonable knowledge of business, accounting and economic activities and with due diligence, will be able to analyze the information provided.

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Information is relevant if it is capable of making a difference in the decisions made by users in their capacity as capital providers. Information can influence the economic decision of users. By evaluating past, present and future events, useful information can be derived. For information to be useful, it has to be relevant to the decisions that are being made.

For example, straight-line depreciation of plant and equipment may be highly predictable from year to year but may not be very helpful in assessing an entity's ability to generate net cash inflows. Also, information about an economic phenomenon need not be in the form of an explicit forecast to have predictive value; it needs only to be a useful input to predictive processes of use to capital providers.


In order for information to be comparability, users need to compare information between entities and over a time period. The information from different entities is comparable if there is consistency in the accounting treatment of the economic events and transactions over time and in the disclosure of accounting policies.

Comparability should not be confused with uniformity. For information to be comparable, like things must look alike and different things must look different. An overemphasis on uniformity may reduce comparability by making unlike things look alike. Comparability of financial reporting information is not enhanced by making unlike things look alike any more than it is by making like things look different.


Verifiability means that the information is reliable. Transactions are always recorded by examining source documents that will form the evidence for the transactions.

To be verifiable, information need not be a single point estimate. A range of possible amounts and the related probabilities can also be verified.

Verification may be direct or indirect. With direct verification, an amount or other representation itself is verified, such as by counting cash or observing marketable securities and their quoted prices. With indirect verification, the amount or other representation is verified by checking the inputs and recalculating the outputs using the same accounting convention or methodology. An example is verifying the carrying amount of inventory by checking the inputs (quantities and costs) and recalculating the ending inventory using the same cost flow assumption (e.g. weighted average cost or first-in first-out).


Timeliness means having information available to decision makers. If there is lack of timeliness, the information may be relevant in a limited manner even though it may be reliable. Therefore, entities have to find a balance between providing timely information which is relevant and reliable. More of one may mean less of the other.

For example, users may need to assess trends in various items of financial reporting information in making investment or credit decisions.


Reliability is the quality of information that allows those who use it to depend on it with confidence.

Financial information is reliable if it is free from error and bias, and represents faithfully the events and transactions that have occurred. Reliable information reflects the events or transactions that have taken place. If the financial statements are prepared under conditions of uncertainty, then caution is advised in exercising judgment and in making any estimates. In other words, prudence is to be applied.

Reliability is the quality of information that assures that information is reasonably free from error or bias and faithfully represents what it purports to represent. With respect to measures, it states that "[t]he reliability of a measure rests on the faithfulness with which it represents what it purports to represent, coupled with an assurance for the user, which comes through verification, that it has that representational quality". Thus, the principal components of reliability are representational faithfulness and verifiability.

Financial Accounting Standards Advisory Council September 2004


The principle of objectivity implies that the accounting data should be verifiable and free from any bias.

Records and statements in accounting are based on the most reliable information available in order for them to be as accurate and as useful as possible. Information that is considered reliable may be verified and confirmed by independent observers. It is mainly ideal in accounting that all records are based on information, which flows from activities that are documented by objective evidence. Without the objectivity principle, accounting records may be based on opinions and impulses that may be subject to dispute.

In fact, to generate the reliable accounting information, the basic requirements are neutrality (free from bias) and verifiability. The historical cost recorded in the books is on the basis of original documents, which contain the information, which is not affected by the personal bias. Therefore, the accounting entries are recorded on the objective basis and are verifiable from the source documents. Historical cost accounting, therefore, is preferred in spite of its shortcomings due to objectivity.

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Financial reporting standards for Malaysia 2th edition Jane Lazar, Huang Ching Choo

Question 1 (b)

Conflict between timeliness and reliability

Financial information which is relevant and reliable and which passes the materiality test may lose its relevance if there is undue delay in it being reported. Thus, the time available to gather and report financial information is a constraint on providing relevant information.

There may, on occasion, be a need to weigh the relative merits of timely reporting and the provision of relevant and reliable financial information. Application of the reporting period convention can often lead to the need to report before all aspects of a transaction or event are known. This can limit the availability of relevant information and have an impact upon reliability. Conversely, if reporting is delayed until all facts are known, this may be too late for users who have to make decisions in the interim.

Conflict between relevance and reliability

The two primary qualitative characteristics of accounting information are relevance and reliability. However, these qualities often can conflict, requiring a trade-off between various degrees of relevance and reliability. A forecast of a financial variable may possess a high degree of relevance to investors and creditors. However, a forecast necessarily contains subjectivity in the estimation of future events. Therefore, because of a low degree of reliability, generally accepted accounting principles do not require companies to provide forecasts of any financial variables.

Reliability and relevance often impinge on each other. Reliability may suffer when an accounting method is changed to gain relevance, and vice versa. Sometimes it may not be clear whether there has been a loss or gain either of relevance or of reliability. The introduction of current cost accounting will illustrate the point. Proponents of current cost accounting believe that current cost income from continuing operations is a more relevant measure of operating performance than is operating profit computed on the basis of historical costs. They also believe that if holding gains and losses that may have accrued in past periods are separately displayed, current cost income from continuing operations better portrays operating performance. The uncertainties surrounding the determination of current costs, however, are considerable, and variations among estimates of their magnitude can be expected. Because of those variations, verifiability or representational faithfulness, components of reliability, might diminish. Whether there is a net gain to users of the information obviously depends on the relative weights attached to relevance and reliability (assuming, of course, that the claims made for current cost accounting are accepted).

Prepared by the Public Sector Accounting Standards Board of the Australian Accounting Research Foundation and the Accounting Standards Review Board