Question

1. What does the Cost vs Benefit constraint mean in the US GAAP framework? How does it apply to accounting situations?

Answer 1

The term cost / benefit constraint refers to an accounting constraint that states the cost of providing information must be measured against the benefit derived from the use of that same information.

In accounting, a cost constraint arises when it is excessively expensive to report certain information in the financial statements. When it is too expensive to do so, the applicable accounting frameworks allow a reporting entity to avoid the related reporting. The intent of allowing the cost constraint is to keep businesses from incurring excessive costs as part of their financial reporting obligations, especially in comparison to the benefit obtained by readers of the financial statements.

The cost constraint only applies to certain types of financial reporting requirements, which are specifically identified in the accounting standards. In all other cases, the reporting of financial information is required, no matter what the underlying cost may be.

From a practical perspective, a business can avoid few financial reporting obligations, for the following reasons:

• The reporting obligations are usually required
• It is relatively inexpensive in most cases to gather, aggregate, and report required information

Thus, the cost constraint typically only applies to a small number of reporting situations.