Question

Conduct Applied Research on Accounting and the Relevance to Financial Reporting.

A detail Research paper on Accounting and the Relevance to Financial Reporting. (Almost like you are writing a book. The Relevance to Financial Reporting.

Answer 1

The primary objective of financial reporting is to provide high-quality financial reporting information concerning economic entities, primarily financial in nature, useful for economic decision making (FASB, 1999; IASB, 2008). Providing high quality financial reporting information is important because it will positively influence capital providers and other stakeholders in making investment, credit, and similar resource allocation decisions enhancing overall market efficiency

Relevance is referred to as the capability “of making a difference in the decisions made by users in their capacity as capital providers” (IASB, 2008: 35). Drawing on prior literature, relevance is operationalized using four items referring to predictive and confirmatory value. As discussed earlier, researchers tend to focus on earnings quality instead of on financial reporting quality. This definition is limited in scope because it 10 neglects non-financial information and it excludes ‘future’ financial information already available to the users of the annual report, for example on future transactions (Jonas & Blanchet, 2000; Nichols & Wahlen, 2004). In order to improve the comprehensiveness ofthe quality assessing measurement tool, this study will consider a broader perspective on predictive value including both financial and non-financial information. Many researchers have operationalized predictive value as the ability of past earnings to predict future earnings (e.g. Francis et al., 2004; Lipe, 1990; Schipper & Vincent, 2003). Predictive value explicitly refers to information on the firm’s ability to generate future cash flows: “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” (IASB, 2008: 36). We consider predictive value as most important indicator of relevance in terms of decision usefulness and measure predictive value using three items. The first item measures the extent to which annual reports provide forward-looking statements. The forward-looking statement usually describes management’s expectations for future years of the company. For capital providers and other users of the annual report this information is relevant since management has access to private information to produce a forecast that is not available to other stakeholders (Bartov & Mohanram, 2004) [R1]. The second item measures to what extent the annual reports discloses information in terms of business opportunities and risks. Jonas and Blanchet (2000) refer to the complementation of financial information by non-financial information, when referring to predictive value, and the knowledge that can be obtained of business opportunities and risks, since it provides insight into possible future scenarios for the company [R2]. The third item measures company’s use of fair value. Prior literature usually refers to the use of fair value versus historical cost when discussing the predictive value of financial reporting information (e.g. Barth et al., 2001; Hirst et al., 2004; McDaniel et al. 2002; Schipper & Vincent, 2003; Schipper, 2003). It is often claimed that fair value accounting provides more relevant information than historical cost because it represents the current value of assets, instead of the purchase price (inter alia Maines & Wahlen, 2006; Schipper & Vincent, 2003). In addition, both the FASB and IASB are currently considering new standards to allow more fair value accounting to increase the relevance

of financial reporting information, since they consider fair value as one of most important methods to increase relevance