The Financial Accounting Standards
Board has identified certain characteristics of
accounting information that make it useful for achieving
the objectives of financial reporting and guide the
selection of accounting principles and policies from
among available alternatives. These characteristics
include:
Relevance—the
capacity 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. In determining what is
relevant, considerations would include:
- Current trends in the market
place;
Reliability—the
quality of information that assures that information is
reasonably free from error and bias and faithfully
represents what it purports to represent.
Comparability—the
quality of information that enables users to identify
similarities in and differences between two sets of
economic phenomena.
Consistency—conformity
from period to period with unchanging policies and
procedures.
In addition to the FASB model, there is
an academic model of earnings persistence that could be
considered. This academic model is based on the
perspective of the investors'
Ability to distinguish core
earnings from non-core earnings;
Ability to segregate peripheral
financial items or business results from results
that are integral to the ongoing business. This
is facilitated by—
Identification of the
company's core earnings;
The SEC's MD&A
concept; that is, disclosure of
information known today that indicates
the relevance or non-relevance of past
performance to expected future
performance; and
Prominent display and
disclosure of unusual and non-recurring
items.
A third model suggests that
preferability and quality are synonyms. In some cases
where the accounting literature offers alternatives, the
literature specifies which model is preferable. Some
believe the preferable principle is always the higher
quality principle. In cases where new standards are
pending, standards issued but not yet effective generally
are viewed as "preferable." Many standards
allow for early adoption and are often considered
preferable to existing practice. Some view early adoption
of a new standard as higher quality reporting. In the
absence of specific accounting literature, some view a
principle that is analogous to a principle embodied in
current literature as preferable or of higher quality.
However, the deficiency in this third
model of evaluating quality is that the terms
"preferable" and "quality" in fact
are not synonymous. A principle need not be preferable in
order for it to be a quality principle.
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