Earnings and comprehensive income have the same broad components - revenues, expenses, gains and loses - but are not the same because certain classes of gains and losses are included in comprehensive income but are excluded from earnings. Those items fall into two classes that are illustrated by certain present practices:
a) Effects of certain accounting adjustments of earlier periods that are recognized in the period, such as the principal example in present practice - cumulative effects of changes in accounting principles - which are included in present net income but are excluded from earnings set forth in in this statement.
b) Certain other changes in net assets (principally certain holding gains and losses) that are recognized in the period, such as some changes in market values of investments in marketable equity securities classified as non-current assets, some changes in market values of investments in industries having specialized accounting needs.
Relevance and reliability or the two primary qualities that make accounting information useful for decision-making. Subject to constraints imposed by cost and materiality, increased relevance and increased reliability are the characteristics that make information a more desirable commodity.
If either of those qualities is completely missing, the information will not be useful. Though, ideally, the choice of an accounting alternatives should produce information that is both more reliable and more relevant, it may be necessary to sacrifice some of one quality for a game in another.
To be relevant, information must be timely and it must have predictive value or feedback value or both. To be reliable, information must have representational faithfulness and it must be verifiable and neutral.
Comparability, which includes consistency, is a secondary quality that interacts with relevance and reliability to contribute to the usefulness of information. Two constraints are included in the hierarchy, both primarily quantitative in character. Information can be useful and it be too costly to justify providing. To be used useful and worth providing, the benefits of information should exceed its costs.
All of the qualities of information are subject to a materiality threshold, and that is also shown as a constraint.
Full Set of Financial Statements
The amount and variety of information that financial reporting should provide about an entity require several financial statements. A full set of financial statements for a period should show:
Information about earnings, comprehensive income, cash flows, and transactions with owners have in common that they are different kinds of information about the effects of transactions and other events and circumstances that change assets and liabilities during a period.
This statement is not considered detail of displaying those different kinds of information and does not include the possibility that some entities might choose to combine so that information in a single statement. Present practice, for example, a reconciliation of beginning and ending balances of retained earnings is sometimes appended to an income statement.
In accounting, materiality is a pervasive concept that relates to the qualitative characteristics, especially relevance and reliability. Materiality and relevance are both defined in terms of what influences or makes a difference to a decision maker, but the two terms can be distinguished. A decision not to disclose certain information may be made, say, because investors have no need for that kind of information (it is not relevant) or because the amounts involved are too small to make a difference.
Magnitude by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made, will not generally be a sufficient basis for a materiality judgment. The Board's present position is that no general standards of materiality can be formulated to take into account all the considerations that enter into an experienced human judgment.
Quantitative materiality criteria may be given by the Board in specific standards in the future, as in the past, as appropriate.
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