Relevance definition
/What is Relevance in Accounting?
Relevance is the concept that the information generated by an accounting system should impact the decision-making of someone perusing the information. The concept can involve the content of the information and/or 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 relevance. 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 business).
Examples of Relevance in Accounting
Here are several examples of how relevance is used in accounting:
Speed of reporting. 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.
Capital investments. 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.
Acquisitions. 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.
Creditor reporting. A company has experienced a strong quarter; issuing these improved results to creditors is relevant to their decisions to extend or enlarge the amount of credit granted to the company.
Related AccountingTools Courses
Best Practices for Producing Relevant Accounting Information
The following are best practices to consider when you are interested in producing relevant accounting information:
Report clarity. Always issue reports that present information as clearly as possible. This means avoiding the use of accounting terminology that readers might not understand. Use graphs when doing so will clarify your presentation. Use a summary section to highlight the information and recommendations that you want to emphasize. In addition, keep the report as short and direct as possible.
Report consistency. When issuing a report over multiple periods, use the same report format each time. By doing so, readers can more easily compare your reports over time. To ease their review task, consider including comparison tables in your reports that show results in comparison to the last few reporting periods. Better yet, highlight the major differences, to draw the attention of readers to critical changes.