The Relevance/Irrelevance Issue

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FINANCIAL ACCOUNTING INFORMATION AND THE RELEVANCE/IRRELEVANCE ISSUE

(Global Business & Economics Review Volume 5 No.2 December 2003 pp:140-175) Stanley C. W. Salvary, Canisius College

ABSTRACT Some current research conclude that the numbers in financial statements are not relevant for three basic reasons. The numbers: (1) are not isomorphic with capital market values, (2) do not have a future orientation, and (3) are un-interpretable since they are based upon five different measurement attributes. The lack of isomorphism argument is invalid since actual current performance is not identical with the capital market expectations of future performance. The lack of a future orientation argument is invalid since financial statements capture what has happened and not what is expected to happen. Since a single measurement attribute is required to produce meaningful measures, the un-interpretability argument holds. A unique measurement attribute is identified in this paper to address this problem

I. INTRODUCTION

In Statement of Financial Accounting Concepts No. 1: Objectives of Financial Reporting by Business Enterprises (SFAC1) [1978], the Financial Accounting Standards Board (FASB) maintains that the function of financial accounting is to generate information useful to a group of users (investors and creditors) for decision-making. The focus on that specific function (decision-making) leads to a concern for predictive value, as opposed to feedback value, in financial statements. This focus has questioned the relevance of the information contained in financial statements for investors’ prediction of the securities market values/stock prices and has ushered in and perpetuated a line of research that views capital market valuation as the basis for determining the numbers to be incorporated in financial statements. However, the relevance of the financial statements…...

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