Relevance and reliability: A trade-off?

Abstract

According to the Statement of Concepts, two qualitative characteristics that financial accounting information should possess are relevance and reliability. There is a long-held belief that there is a trade-off relationship between these qualities. However, very little empirical investigation has tested the presence of this relationship, and that which has found no empirical support for this.

This dissertation investigates the correlation of interest groups’ perception differences between the relevance and reliability of historical cost and fair value measures. 397 participants from three interest groups; debt providers, equity providers, and statement preparers, were solicited for this sample, with 228 (57.4%) usable responses received. The convergence toward International Financial Reporting Standards (IFRSs), and its preference for fair value, was utilised as the setting for this investigation. With the belief that there is a trade-off in relevance and reliability with the move from historical cost toward fair value, six topical asset classification examples were tested.

Individual analysis of the three groups found a positive relationship, which was significant on almost all occasions, between the perceptions of relevance and reliability. While the results go against the long-held belief of a trade-off between relevance and reliability, the results are consistent with previous empirical findings in this area. These research results have implications for standard setters that advocate, and mandate, the use of historical cost which appears to provide information which is both less relevant, and less reliable.