Question

Explain why the predictive and confirmatory values are important information being relevant and represented faithfully.

Answer 1

Financial reports represent economic phenomena in words and numbers. To be useful for decision making, financial information must not only represent relevant phenomena but must faithfully represent the phenomena that it purport to represent . However, to be a faithful representation,information must be complete, neutral and free from error. To be complete, financial reports must include all information necessary for a user to understanding the phenomenon being depicted, including all
necessary descriptions and explanations. To be neutral, financial reports must be without bias in the selection or presentation of financial information. This implies that financial information must not be manipulated in anyway so as to influence the decisions of users. And to be free from errors, financial reports must have no errors in the description of a phenomenon and in the process by which thefinancialiw informationas produced. Therefore, financial information must be both relevant and faithfully

represented if it is to be useful. Neither a faithful representation of an irrelevant phenomenon nor an unfaithful representation of a relevant phenomenon helps users make good decisions.

Relevance refers to the ability of information to make a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations . Relevance considers the fact that the information in necessary to the users in
order to sustain the economic decisions . On its part, IASB (2010) regarded relevance as the
capability of accounting information to making a difference in the decisions made by users in their capacitas capital providers. It asserts further that, that financial information is capable of making a difference in the decisions if it has predictive value, confirmatory value, or both. Predictive value explicitly refers to information on the firm’s ability to generate future cash flows. According to IASB, information about an economic phenomenon has predictive value if it has value as an input to predictive processes used by capital providers to form their own expectations about the future. On the other hand, confirmatory value contributes to the relevance of financial reporting information. Information has confirmatory value if it confirms or alters past (or present) expectations based on previous estimations.