Many accountants argue that relevance and reliability often require trade-offs. Define both relevance and reliability and explain what is meant by "trade-offs" between relevance and reliability. Include in your explanation a specific example of where trade-offs could occur

Answer 1

Relevance is the capacity of information to make a difference in a decision by helping users form predictions about the outcome of past, present, and future events or to confirm or correct prior expectations. Reliability is the quality of information that assures that information is reasonably free from error and bias and faithfully represents what it purports to represent.

Accounting information must be both relevant and reliable to be useful to decision makers. Attributes relevant to a user's decision process may not always be susceptible to reliable measurement.

For most entities, the use of only cash sales would provide reliable data. Failure to include credit sales, however, makes the revenue figure less relevant than it could be in assessing the entity's financial health. A revenue measure that includes orders for future delivery may be relevant but is less reliable because these future orders may be canceled. Similarly, the current value of the intellectual assets of a high technology company clearly is relevant to many decisions relating to the company. No reliable means of establishing these values may exist, however.

Emphasizing reliability results in long preparation times as information is double-checked. Estimates and forecasts that cloud data with uncertainty are avoided. Relevance, on the other hand, often requires the use of instant information full of uncertainty.