Memorandum Case

Memorandum Case Essay Sample

Discuss the concept regarding relevance. In your opinion, would the amounts reported by simply U. S. companies regarding property, plant, and gear be more or less relevant than the present cost amounts reported by simply companies in britain, Mexico, or even elsewhere? RelevanceInformation is relevant when it influences the particular economic decisions of users by helping them examine past, present, and upcoming or by confirming or even correcting their past assessments. Relevance is also impacted by materiality. Information provides the quality of importance when it is ‘ capable of making a distinction in the economic choices of users by helping them evaluate the effect of past and present occasions on future net cash inflows (predictive value) or confirm or correct previous evaluations(confirmatory value), even if it is not being used’ (FASB, 2005: 2; FASB 1980: 37). In the IASB framework information has the particular quality of relevance ‘ when it influences the economic decisions of users by helping them examine past, present of upcoming events or confirming, or even correcting, their past evaluations’ (IASB, 1989: 24).

Both frameworks thus say that accounting information is relevant if it has the capacity to make a difference in a decision. The FASB requires info to be capable regarding setting up a difference in the economic decisions of consumers ‘ even though it is usually not being used’. However , to be relevant typically the IASB definition additionally demands that information is used i. e. influences the particular decision maker for making economic decisions. Another small distinction between the FASB and IASB framework is the FASB framework explicitly mentions that relevant information has to have predictive plus feedback value, as the IASB uses these terms implied in its framework. ‘ The predictive and confirmatory roles of information usually are interrelated (IASB, 1989: 27).

First, the particular FASB framework defines timeliness an ancillary aspect of relevance.

Information must be available when users need it. Despite the fact that timeless alone cannot create information relevant to consumers, an absence of timeliness may result in a lack of relevance of information reported as well as make that irrelevant (FASB, 1980: 56; IASB, 1980: 43). Even though the assumptions of the IASB are equal in order to the assumptions of the FASB, the IASB does not define timeliness being a component of relevance nevertheless as a constraint on relevant and reliable info. If the financial statement is published earlier, the relevance of the financial record increases. In the new framework timeliness is expected to be an ancillary element of relevance.

Next, the IASB framework identifies materiality as an attribute of relevance, while in the FASB hierarchy materiality is situated as threshold for recognition. ‘ Details is material if the omission or misstatement may influence the economic decision of users taken based on the financial statements’ (IASB, 1989: 30). However, the particular materiality criterion may not only affect the meaning of information, this may also have effect on other qualitative characteristics such as faithful representation. Consequently, materiality provides to be viewed as the filter to determine whether or not information is sufficiently substantial to influence the decision of users (FASB, 2005: 3).

ReliabilityB. Discuss the concept of reliability. In your thoughts and opinions, would the amounts reported by U. S. companies with regard to property, plant, and gear be more or much less reliable than the existing cost amounts reported by companies in England, South america or elsewhere? In the particular FASB framework information has the quality of dependability when this information meets the particular attributes representational faithfulness, verifiability and neutrality (FASB, 80: 21). Inside the IASB framework, information is reliable when ‘ it is free coming from material error and tendency and can be depended upon by users to be able to represent faithfully that which usually it either purports in order to represent or could moderately be expected to represent’ (IASB, 1989: 24). The particular FASB and IASB frameworks thus differ fundamentally in the manner they determine ‘ reliability’.

Both frameworks include devoted representation as an characteristic of reliability.

Representations are faithful if you have a correspondence or contract between the accounting actions or descriptions in typically the financial reports and the particular economic phenomena they purport to represent (FASB, 80: 6; FASB, 2005: 3). The difference between reliability and a faithful representation is usually ambiguous. Since the features neutrality, completeness and compound of economic phenomena (substance over form) can become classified as qualities of faithful representation, reliability becomes unnecessary. Consequently, a point of attention is to talk about what actually the notions stability and faithful representation suggest and exactly what they do not mean (FASB, 2005: 2-3). In both frameworks neutrality is defined as free of charge from bias. ‘ In order to that end, the typical conceptual framework should not include conservatism or prudence among the desirable qualitative characteristics of accounting details. However the framework need to note the continuing need to be careful within the face of uncertainty’ (FASB, 2005: 3).

In the IASB framework, prudence is defined inside terms of a level of caution. The require to be careful implies to allow a degree of caution and consequently to permit a level of prudence, but avoid overuse of prudence. ‘ Any overuse of wisdom leads to a loss of transparency, which explains why the ASB is right to be wary of it. When this is excessively or inconsistently applied, it can make obfuscation regarding results and trends possible’ (Paterson, 2002: 1). Trends in financial reporting work contrary to a faithful representation. The use regarding small level of prudence since far-sighted of what can happen in the long term should never be a problem. Within the IASB framework, completeness explicitly was connected to stability, while in FASB construction completeness is implicitly connected to reliability. We explained that will reliability will be replaced by faithful representation.

An omission of material elements can result in information to be false or misleading and therefore unreliable (IASB framework, 1989: 38). An omission could also create a view in the financial report inside which the report really does not represent the transactions it purports to symbolize. In the new platform, completeness will be linked to the quality faithful representation. Faithful representation also includes substance over form capturing the substance of these economic phenomena and not merely their legal type (IASB, 1989: 35). In the FASB framework verifiability is used in conditions of consensus among actions and that the actions have been used with out error or bias. Within the FASB framework verifiability is explained as a new sub notion of reliability. To verify whether info is represented without problem, people should examine the main documents (like an invoice) and monitor every action of the internal auditor.

The objective of financial reporting is usually to be useful with regard to a wide range of users. It’ h not possible for every consumer to check and keep track of. Where the preparer of economic statement should consider verifiability as a possible important attribute of faithful representation and an external auditor must check (verify) the financial report of a company as a good independent party, the buyers should consider verifiability as a constraint. Verifiability is as a result an important sub belief of a faithful representation, yet in reality it’ h impossible for each user to verify. Consequently , verifiability functions contrary to the aim of financial reporting in addition to should be deleted because a qualitative characteristic plus should be taken regarding granted like a constraint. The particular verification of the financial statement is executed by the external auditor and may end up being seen as an offered fact.

ComparabilityC. Discuss the qualitative concept of comparability. In your current opinion, would the monetary statements of company’ h operating in one associated with the foreign countries detailed above be comparable to the U. S. company’ t financial statement. Explain.

Comparability enables consumers to identify and explain similarities in and differences between economic phenomena (FASB, 2005: 8). ‘ Users must be able to be able to compare thefinancial statements associated with an entity through period in order to determine trends in its financialposition and performance. Users must also be able to compare the financial claims ofdifferent entities in buy to evaluate their budget, performance and changes infinancial position’ (IASB, 1989: 39). With comparability, users has to be able to compare a businesses performance over period and to make reviews with the performances of other companies. The framework furthermore recognizes the timeliness plus the benefits and expenses were constraints on offering both relevant and trustworthy information. Information is dependable when it is free of material error and prejudice, and when users can depend into it to symbolize faithfully that which that purports to represent. Occasions must be accounted for and presented according to their material and economic reality, plus not just their lawful form.

Within the FASB framework consistency – using the same accounting methods over aspan associated with time (FASB, 1980: 42) – is defined as a component of comparability. An increasein the level of uniformity will lead to a good increase in the level of comparability. TheIASB framework will not explicitly mention consistency because attribute of comparability but also suggests that consistency positively influences comparability.

To conclude, both the FASB and IASB have identified a similar principal set of qualities of sales information to make details provided useful to customers in making economic decisions. Despite their conformity upon abstract level, the attributes to give meaning for the definition of reliability differs substantially. Although both the particular FASB and IASB possess defined understandability, relevance, reliability and comparability as characteristics of accounting information that will make information decision beneficial provided useful to users in making economic selections, Figures 3 and four show that they possess arrayed them in a different manner. The FASB framework hierarchical structures these qualitative characteristics, while the IASB framework ranks them similarly relevant.

Fair presentation is an issue. Both standard setting party bodies permit departure from standards when their application results in misleading details. Because of this, presently there is a greater probability that there will be a difference in the interpretation of fair demonstration criteria.


– Data processing Standards Board (2005),, 22-06-2005.,20-09-2005., 05-10-2005., 22-06-2005., 22-06-2005.