Cost constraint definition
/What is a Cost Constraint?
In accounting, a cost constraint arises when it is excessively expensive to report certain information in the financial statements. When it is too expensive to do so, the applicable accounting frameworks allow a reporting entity to avoid the related reporting. The intent of allowing the cost constraint is to keep businesses from incurring excessive costs as part of their financial reporting obligations, especially in comparison to the benefit obtained by readers of the financial statements.
While the cost constraint does exist, it can be difficult for a company to claim that it cannot report certain information when competing firms in the same industry are reporting that information. Consequently, a review of the financial statements of competing firms is a good way to decide whether the cost constraint can be claimed as a valid reason not to report information.
Applicability of the Cost Constraint
The cost constraint only applies to certain types of financial reporting requirements, which are specifically identified in the accounting standards. In all other cases, the reporting of financial information is required, no matter what the underlying cost may be. From a practical perspective, a business can avoid few financial reporting obligations, for the following reasons:
The reporting obligations are usually required
It is relatively inexpensive in most cases to gather, aggregate, and report required information
Thus, the cost constraint typically only applies to a small number of reporting situations.