Question

In: Accounting

Why is there a trade-off between relevance and reliability in financial reporting? Give examples in your...

Why is there a trade-off between relevance and reliability in financial reporting? Give examples in your explanation.

Solutions

Expert Solution

Relevance in financial reporting means the information or data presented in the financial statement should be suitable for taking financial decisions. On the other hand reliable in the context of financial reporting means that the financial information should be true and not misleading.

There is a trade-off between relevance and reliability because of time constraints. For example, investors want to know the financial information of the company before the financial statements are audited for the current year. In this case the information would be less reliable because the financial statement has not yet been audited. Whereas, if the investors wait longer till the audit is over, they would get reliable information but the information may not be relevant. For example, investors want to invest their money in the current period (say, current month) but if they get the financial information about share prices in the later period they won't be able to invest profitably and hence the information would be irrelevant, though reliable.


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