The cost benefit principle clutches that the cost of providing information via the financial statements must not go beyond its effectiveness to readers.
This is a significant issue from two perspectives, which are:
- Level of detail provided. The company controller should never spend an inordinate timeframe fine-tuning the personal statements with immaterial adjustments. This includes not providing an inordinate level of supporting information inside the accompanying footnotes.
- Types of information required. The standard setting entities must judge the degree of information they need organizations to report into their financial statements, so that certain requirements do not cause too much work for these businesses.
Another consideration is that providing more information requires more the perfect time to produce the monetary statements. If an inordinate period of time passes because of the call to prepare more data, it can be argued that this utility of the actual resulting financial assertions is reduced for readers, since the knowledge is no lengthier timely.
Examples of situations in which the cost benefit principle arises are as follows:
An industry has just purchased another entity, and finds that there is a few improbabilities regarding the last outcome of derivatives to which the acquire is a party. A general amount of modeling could define the extent of the probable gains and losses associated with these derivatives, but the cost of the modeling would be $100,000. It is more cost-beneficial for the trade to wait few months for the derivatives to resolution themselves.
The manager learns that a long-term worker has been occupied in a low level of petty cash theft for the past few years. The probable amount of the loss is a few thousand dollars, though an wide appraisal by the firm’s auditors could perhaps pin down a more accurate figure, at the cost of a $10,000 audit. The manager elects to skip the audit, since the cost-benefit affiliation is so poor.