What is relevance in accounting?

Relevance is the concept that the information generated by an accounting system should impact the decision-making of the individual or entity that peruses the information. The concept can involve the content of the information and its timeliness, both of which can impact decision making. In particular, information that is provided to users more quickly is considered to have an increased level of revelance.

This impact may be simply to confirm a decision that the reader has already made (such as to retain an investment in a company) or to reach a new decision (such as to sell an investment in a company). Here are several examples of how relevance is used in accounting:

• A company controller decides to accelerate the month-end close, so that she can issue financial statements in three days, rather than the old standard of three weeks. This improves the speed with which various internal and external parties receive the financial statements, which improves the relevance of the information they receive.
• The industrial engineering manager is considering the installation of a new, higher-capacity machine in the production area. If the sales department issues a new forecast that shows a decline in sales, this has great relevance to the engineering manager's decision, since it may no longer be necessary to acquire such a high-capacity machine.
• A company is contemplating the acquisition of another firm. If the acquiree reveals that it has a previously undocumented and material liability, this is relevant to the decision of the acquirer in regard to whether it should extend an offer to buy the acquiree, and the price it is willing to pay.

Related Topics

Consistency principle
Full disclosure principle
Materiality principle
Reliability principle
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