Relevance and reliability are the two main accounting principles. By relevance we mean the information available for a given set of financial figures in order to accommodate the user of the financial statements in making an informed decision.
On the other hand, by reliability we mean the level of trust a decision maker can give to the financial figures presented in the financial statements. Misstatement and omission from the financial statements of important information which may affect the decision of the users may render the reliability in to danger.
Example # 1
Alpha industry has a customer with whom the company has credit line of $5 millions. The total assets of the company are $15 million. Later, it comes to the knowledge of the company that the same customer has gone into liquidation. This information is relevant and must be incorporated into the financial statements even if it comes into knowledge after the balance sheet date but before the date of issue.
However, if the amount of default is $1000, then there is no need to disclose this information as the materiality of the transaction amount renders the information irrelevant.
Example # 2
YTC is a mid-sized company engaged in producing chemical for industrial clients. Due to producing low quality chemicals and causing severe damage to one of its client, a lawsuit has been filled. Board of directors and lawyers of YTC are sure that if the case comes against them, it would lead to the liquidation of the company on the order of the court. YTC has to disclose this information in its financial statements to ensure that its reports are relevant and reliable. This information helps the stakeholders in making decisions and make future strategies. Non disclosure could lead to decisions which may prove detrimental to their interest.
Example # 3
The TUK Plc is engaged in providing cable TV services at metropolitan level. Due to its excellent performance and customer service, it has achieved increased sales and as a result, it is enjoying higher profits and improved cash flows. Their earnings per share (EPS) figure have risen from $10 to $12 this year. TUK Plc is required to disclose this information in its financial statements. This helps the users of the financial in making informed decisions.