What does the principle of relevance require in financial reporting?

• A. All historical costs must be reported
• B. Information must be useful for decision making
• C. Only reliable data can be reported
• D. All information must be verified by an auditor

Answer: (B)

The principle of relevance in financial reporting emphasizes that the information presented must be useful for decision-making purposes. This means that the data included in financial statements should have the potential to influence the decisions of users, whether they are investors, creditors, or other stakeholders. Relevant information helps these users assess past, present, or future events and is crucial for comparing different investment opportunities or evaluating a company's financial health.

For information to be considered relevant, it must not only be timely but also provide value in understanding the financial performance or position of an entity. This principle essentially guides the inclusion of data that can impact economic decisions, highlighting that the goal of financial reporting is to provide insights that assist in making informed choices.

Historical costs, while providing some level of useful information, do not necessarily meet the criteria of relevance on their own, as they may not reflect current market conditions or the future potential of an asset. Reliability is indeed an important characteristic of financial information, but it must work in conjunction with relevance; simply having reliable data does not guarantee that it will be pertinent for decision-making. Lastly, the requirement for all information to be verified by an auditor pertains more to reliability and accuracy rather than relevance; not all relevant information mandates an auditing process.